As the presidential election race has tightened in the United States, the debate over which candidate would be better for stocks has risen to a fever pitch among analysts and investors.
JPMorgan's Tom Lee – one of the most sanguine equity strategists on the Street – thinks the election outcome will be a bullish catalyst for the market regardless of who wins, because it should provide some more certainty to how the fiscal cliff could be resolved.
In a note to clients this morning, Lee writes:
We are less than a week away from presidential and congressional elections, and there has never been an election where the spread between polls is 100bp (seven elections since 1900 were between 2% and 5%). Historically, equity markets have rallied following a close election, regardless of the winner (incumbent or challenger), likely benefitting from the reduced uncertainty.
The 100bp spread Lee refers to had closed to 0, according to the poll's latest reading on Monday, as Governor Romney moved into a 48-48 tie with President Obama.
Measuring by another poll, this is the closest presidential race since at least 1936.
Lee looks at the closest races of the past 100 years for a precedent to how stocks might react this time.
Here are the races Lee includes in his note:
And this is how stocks did going into and coming out of those elections:
Referring to the above charts, Lee writes:
Note the markets rallied following close elections by 3.3%, regardless of winner. Why? We believe this reflects the easing of uncertainty, which as we know tends to suppress equity valuations. But notably, when the challenger (or party challenger) won, markets tended to rally even more strongly, gaining nearly 6% on average. In either case, we believe markets will see some gains following the election.
However, some analysts think a close race could lead to worse outcomes for markets than otherwise. Click here to read about all of the things that could go wrong next week >
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