The Political Business Cycle: More Risk This Time?

Posted May 25, 2016 by rvillareal

• Since stock prices usually rise in election years, incumbency and/or close races do not guarantee a down stock market.
• Unfortunately, political (and economic) risk may be rising this presidential election year, which offers the starkest choice between major party candidates since 1896.  It may prove to be a tight for a number of reasons.
• Two-term (Democrat) incumbency has been a distinct disadvantage as voters usually tire of the incumbent party.
• Trump has been an effective and unpredictable campaigner compared to the lackluster Clinton.  He may very well tack to the center to gain votes.
• A much slower expansion with little change in the unemployment rate may also prove a handicap to Clinton.  Even a small rise in the unemployment rate has meant defeat for the incumbent party.
• Most investors think Trump represents too much change and Clinton, the “safe choice” will prevail.  However, if the election race should tighten, a close race may present investors with “too much” uncertainty and a reason to dump stocks.