Does the stock market suffer from buyer's remorse after U.S. presidential elections? It looks that way, based on market activity over the past eight elections: While investors seem upbeat about the election in the run-up to results, stocks have a tendency to decline on the day after.
Bespoke Investment Group looked at the behaviour of the S&P 500 going back to the 1984 election. On average, the index has risen 0.85 per cent the day of the election, but it has declined an average of 0.9 per cent the day after – and that doesn't include Wednesday's tumultuous drop that has threatened the S&P 500 with its biggest one-day decline in a year.
The 30-member Dow Jones industrial average is also suffering, with a decline of about 2.1 per cent in mid-afternoon trading, marking a slight comeback from a deeper decline earlier. Bespoke ranked the biggest declines by the Dow in post-election trading and found that Wednesday's dip was the fifth worse going back to 1900.
Curiously, the day after Barack Obama was elected to his first term in the White House, the Dow suffered its worst post-election day decline ever – with a dip of 5 per cent on Nov. 4, 2008.
Of course, there was a lot more going on than mere political change back then, given that the financial crisis was in full swing and U.S. employment levels were declining at a catastrophic pace.
Is Wednesday's decline similarly unrelated to the election result? Maybe, maybe not.
After all, Europe's economy remains a concern – and Germany's manufacturing took a turn for the worse in a report on Wednesday. As well, the election brings into focus the No. 1 concern among investors: The looming U.S. "fiscal cliff" of automatic tax increases and spending cuts if a government deal isn't struck soon.
But some of the action does appear to be connected to the Democratic victory in the White House. Within the Dow, the declines were led by financials: Bank of America Corp. was down 5.6 per cent in afternoon trading, while JPMorgan Chase & Co. was down 4.6 per cent.
Do investors fear a government backlash against financials? Paul Krugman, writing on his New York Times blog, pointed out that after getting bailed out by the U.S. government during the financial crisis, Wall Street was anything but grateful: "Top financial types were furious at Obama for occasionally hinting that some of them might have misbehaved a bit. And investment bankers – who normally lean Democratic – went overwhelmingly to the other side, pouring cash into Mitt Romney's coffers in the no doubt correct expectation that a Romney administration would dismantle financial reform and treat their wealth with the adulation they believe to be their birthright."
Other stocks appear to be falling on the expectation that the Obama administration will implement a minimum tax on corporate savings held overseas.
Apple Inc. was down 3.8 per cent in afternoon trading – flirting with a decline of 20 per cent from its record high. The latest dip coincides with concerns that large tech companies with particularly massive piles of overseas cash could be hit. Apple's stash is nearly $83-billion (U.S.), while Microsoft Corp. has $54-billion overseas and Cisco Systems Inc. has $42.5-billion.
"At the end of 207, there was $1.7-trillion held offshore, due to the 35 per cent tax on profits earned overseas," said Andrew Busch, global currency and public policy strategist at BMO Capital Markets, in a media conference call.
"The difference between President Obama and Mitt Romney on this issue was very stark. Romney wanted the tax cut from 35 per cent to zero. The President, on the other hand, wants a minimum tax on this."
Mr. Busch argued that the changes could have a big impact on big technology companies, along with big pharmaceutical firms that also have big amounts of cash held overseas.
Among pharmaceutical firms, Pfizer Inc. was down 1.7 per cent and Merck & Company was down 3.1 per cent. Microsoft was down 2.3 per cent, but Cisco was down just 0.9 per cent.
David Berman