Close Elections Boost U.S. Stocks, Deutsche Bank Says

With Barack Obama and Mitt Romney tied in polls, Deutsche Bank AG says investor uncertainty going into the elections may actually be priming the U.S. stock market for the biggest possible gains.

The Standard & Poor’s 500 Index typically gains 5 percent through year end after close presidential contests. That’s more than double the 2.3 advance that it has posted since 1948 after “predictable” elections, according to Binky Chadha, the firm’s New York-based chief global strategist.

“Clearly predictable elections saw the S&P 500 essentially continue its prior trend,” Chadha wrote in a note today. “Close elections on the other hand saw the S&P 500 flat in the lead up to, but rally a strong 5 percent on average afterward, regardless of which party won. The latter behavior is consistent with a classic risk premium reflecting uncertainty about the outcome in the run up with a rally on its resolution.”

Obama is fighting for a second term amid economic growth proving too sluggish to decrease a jobless rate that hasn’t been below 8 percent since January 2009, the month he took office. The S&P 500 has rallied 11 percent this year as the Federal Reserve pledged to safeguard the U.S. economy and European leaders worked to contain the region’s debt crisis.

Republicans taking full control of Congress may be more bullish for stocks, which climbed 15.1 percent on average when that party controlled the legislative branch, according to Chadha, whose prediction that the S&P 500 would climb 26 percent in 2009 was only 3 percentage points off from the measure’s rally that year.

“Republican control of Congress has been very positive for equities historically, independent of the party of the president,” Chadha wrote, citing S&P 500 returns for all years since 1933, including non-election years.

Chadha cited better than even odds given by traders in the online prediction market Intrade that Democrats will lose control of the Senate and give Republicans control of both houses. Bets made via the Dublin-based bookmaker today showed a 53.7 percent chance that Democrats would lose control of the upper chamber, while traders priced in 57.9 odds Obama will be re-elected on Nov. 6.

The presidential race is too close to call according to the latest daily Gallup poll, in which Obama leads Romney 47 percent to 46 percent. The margin of error is three percentage points, making results within that range statistically negligible.

The postwar era’s big surprise, Chadha wrote, was the correction following Harry S. Truman’s 1948 defeat of Republican challenger Thomas Dewey, memorialized in a famed photo of the incumbent Democrat waving a copy of the Chicago Tribune with the mistaken front-page headline: “Dewey Defeats Truman.”

The news surprised stocks too. The S&P 500 plunged to 15 from 16.70 for a 10 percent drop over six trading days.

Inyoung Hwang contributed to this post.

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