The Obama Trade
Wall Street loves Romney and Republicans. The stock market likes Obama and Democrats. By Matthew Zeitlin
Should we care what Wall Street thinks about the election? After all, many investment bankers, money-managers, and (especially) hedge-funders were swept up in Obamamania in 2008 – only to change course decisively in 2012.
While Obama easily out-raised McCain among financiers, Romney is beating Obama by more than three to one in contributions from the financial sector. The five organizations whose employees have donated most to Romney are all banks. Obama? He’s getting financial love from employees of Harvard, University of California-Berkeley, the federal government, Microsoft, and Google.
Now, the word on the street is that everyone is voting for Romney – but that they expect Obama to win. On Monday, John Carney at CNBC.com described what he viewed as the political capitulation of Wall Street’s pro-Romney crowd. No surprise there. These guys can read polls and election models like everybody else.
One can understand Wall Street’s personal preference for Romney over Obama. Obama has pledged to raise money managers’ taxes; Romney wants to cut them. But it’s harder to grasp theWall Street’s enduring professional preference for Republican presidential candidates.
Two thirds of money managers surveyed by CNN said that Romney would be better for stocks than Obama a view that is surely widely-held by the masses of Romney voters and donors in the financial services industry.
Of course, there’s no anecdotal or historical evidence – recent or distant – that suggests Democrats in the White House doom the financial markets or that Republicans are particularly good for them.
Just look at the last four years year: since bottoming out in March 2009, the stock markets have enjoyed a rip-your-face-off rally. From the day Stanford economist Michael Boskin declared, in aWall Street Journal op-ed, that “Obama’s radicalism is killing the Dow,” the markets have essentially doubled. Even accounting for the sickening downdraft of early 2009, the markets have done quite well during the Obama presidency. As this New York Times graphic shows the Dow has enjoyed a compounded 8.8 percent annual return during Obama’s presidency. That makes Obama’s term the 11th best term out of the past 28 for stocks.
By contrast, the eight years of George W. Bush’s reign were a disaster for stock markets. In his first term, the Dow suffered an annual compounded loss of 2.2 percent, and in his second term, the Dow suffered an annual compounded loss of 1.8 percent. Wall Street may have loved George W. Bush personally; but professionaly the Bush years were a lost decade. Bill Clinton, of course, oversaw a long economic boom, with the stock market gaining more than 16 percent each year during his tenure. The best single presidential term for stock, of course, came under Franklin Delano Roosevelt, the Wall Street bogeyman who saved American capitalism.
One possible self-serving explanation for Wall Street’s Romney infatuation is the performance of banking stocks under Obama. Since election day 2008, the financial sector has seen just under 14 percent growth, while the S&P 500 as a whole has grown just over 35 percent. Of course, this performance would have been much worse had the Obama administration not continued the financial bailouts initiated by the Bush administration.
But over the long haul, Democratic occupancy on 1600 Pennsylvania Avenue has generally coincided with stronger stock market growth. According to data from Bespoke Investment Group, since 1900, the stock market has seen 7.1 percent annual growth under Democrats and 3 percent under Republicans. Much of this is due to the fact that some the nastiest stock market crashes – in 1929 and 1987 -- occurred under Republicans’ watch.
The preferences of Wall Street are not likely, in the end, to matter all that much. New York, New Jersey, and Connecticut are all locks for Obama. But it is sort of grating that the sector that has benefitted so much from the assistance and easy-money policies of the Obama administration and its appointees doesn’t express more gratitude.
Of course, there’s one final factor that may help describe why Wall Street is perpetually suspicious of Democratic candidates – and of Obama in particular. One of Wall Street’s most-repeated phrases is this: Past performance is no guide to future performance. Just because a hedge fund posted an 80 percent gain last year, it doesn’t mean it can do so again. And here, Wall Street is right to be skeptical of future performance. Should Obama win, his second term will not be any more friendly to Wall Street and its prerogatives than the first term. Taxes will surely rise on some high earners, new regulations will be implemented, the Consumer Financial Protection Board is getting its sea legs, Massachusetts seemed poised to elect Wall Street scourge Elizabeth Warren as a Senator. And it’s highly unlikely that stock or bond returns in the 2013-2016 period will rival those from 2008-2012.