UAB Expert Commentary Election Impacts Stock Market Swings

Bankrupt banks, government bailouts and rising unemployment: just a few in a series of factors that has led to violent swings in the stock market since late September. Now the markets face Tuesday’s election, and the numbers at the polls are likely to affect the numbers on Wall Street, according to Andreas Rauterkus, Ph.D., assistant professor of Finance at the University of Alabama in Birmingham.

November 3, 2008 

•  Andreas Rauterkus available Nov. 3, 4

•  Nov. 3 from 1 to 5 p.m.

•  Nov. 4 from 11 a.m. to 12 p.m. and 2 to 4 p.m.

BIRMINGHAM, Ala. - Bankrupt banks, government bailouts and rising unemployment: just a few in a series of factors that has led to violent swings in the stock market since late September.  Now the markets face Tuesday's election, and the numbers at the polls are likely to affect the numbers on Wall Street, according to Andreas Rauterkus, Ph.D., assistant professor of Finance at the University of Alabama in Birmingham.

"The market always reacts to a national election," Rauterkus said. "It will react especially strongly if something unexpected happens, because the market reacts to the unexpected, not the expected."

The Associated Press reports that Democratic presidential candidate Barack Obama's tax policies include proposed tax cuts or frozen tax rates for families making less than $250,000 a year.  Obama would increase taxes for families making more than $250,000 annually as well as institute a still unknown percentage increase in the corporate tax rate. 

Republican presidential candidate John McCain's tax policies include a proposed 25 percent reduction in the corporate tax rate.  McCain would also continue the so called Bush tax cuts instituted by the president in 2001 that are set to expire in 2010.  Rauterkus said a study of the candidates' tax policies indicates which of the two would be more welcomed by Wall Street. 

"You would probably see the markets climb higher if Senator McCain were to win," Rauterkus said. "Wall Street is traditionally more positive to Republicans.

 "In this case investors would see McCain as someone who supports lower taxes with less regulation, and that is what the market wants; it wants to be a freer market," Rauterkus said.

Still, Rauterkus said, an Obama victory would not necessarily lead to a significant drop in stock values.  The market and its investors have likely priced an Obama victory into the market ahead of Tuesday's election because the Illinois Senator has been ahead in national election polling for more than a month.

"I would not anticipate substantial gains or losses if Senator Obama is the winner," Rauterkus said.  "The markets expect that to happen, and so it should not negatively affect them."

Rauterkus did say that the market could still move negatively on news relating to Tuesday's congressional voting.  He said that the market traditionally looks unfavorably on a single party owning an overwhelming majority in both the legislative and executive branches of government.  A Monday report in the New York Times reflected the Democratic Party's potential to win a Senate super majority of 60 seats to break filibusters and gain dozens of seats in the House of Representatives.

"Whichever party wins the presidency, the markets prefer balance in Washington," Rauterkus said.  "So this is an issue to follow closely because if one party gains an overwhelming majority or perceived total control in government then the markets could react negatively."