Investment managers and analysts believe that, unlike previous elections, where markets reacted swiftly to election results, the fact that this year’s race came down to the wire stopped investors from taking any gambles.
Historically, markets in the US have always reacted better when a Republican has been voted in while in the UK they rally when a Democrat has been elected.
Statistics from Halifax Financial Services show that, on average, in all post-war US elections, the Dow Jones Industrial Average has risen by 3 per cent in the two months after the election following a Republican win and by 2 per cent after a Democrat win.
In the UK, the FTSE is generally unchanged during the same period after a Republican win but has risen an average 5 per cent for a Democrat victory.
But analysts say that because of the convoluted outcome of the last election, when Gore and Bush fought out the result in the courts, a rally of this type is unlikely this time.
There was a brief rally in the US and UK markets following the election. The Dow Jones index rose by 130 points, 1.2 per cent, on Wednesday. In the three weeks leading up to the election, the Dow Jones had dropped by 5 per cent.
Mid-morning trade in the UK also produced an increase in equity prices as the FTSE 100 rose by 25 points.
As opinion polls continued to suggest that Bush and Kerry were tied on 49 per cent of the vote on polling day, investors and managers were taking no chances on the result.
Henderson Global Investors director of economics and strategy Terry Dolphin says: “Generally, any severe shifts in the market are down to people taking gambles on the outcome. They will have taken a bet either way and will probably be taking their money out after this. But with the result of this election in doubt right until the end there was no one prepared to put their money either way. It was too close to call.
“What was very important for this election was to get a clean result, and we got this. I think that it would have done the markets no good at all if the election had dragged on while both sides contested the result. You cannot have that sort of sustained confusion.”
The impact that this would have had on markets is clear from the last election, when the Dow Jones fell by 2 per cent following Bush’s election in 2000.
The Centre for Economics and Business Research is standing by the traditional view that a Republican win will be good for equities and bad for bonds. Its economists are predicting that consumer spending in the US will finally be reined in and that the dollar will rally. This is a view which flies in the face of others, who predict that the dollar will fall against the pound in the medium term.
CEBR chief executive Douglas McWilliams says: “The president has allowed relatively heavy levels of federal government expenditure to take place in the past four years, to some extent under political pressure.
“As these pressures relax, we would expect to see expenditure brought under some control. The temporary tax cuts are likely to become permanent. If these assumptions are correct, even if bonds drop in the short run, they could well strengthen over a six-month horizon.”
Crucially for the UK, the CEBR believes that Prime Minister Tony Blair’s standing within his own party and in Parliament could be improved by the Bush victory.
It has staved off any damage that could have been caused by changes in policy and dealing with a new US president and will bolster investment policy in the UK, says the CEBR.
Many analysts are also claiming that a Bush victory could be good news for oil prices. During the election campaign, talk from fund managers was of the possibility of reducing regulations on drilling in the US and of securing overseas oil distribution. With this now increasingly likely, prices could drop further with the promise of new supply.
Britannic Asset Management chief investment officer James Smith says a clear-cut election was vital for world markets to improve confidence. He says the belief that a Kerry win would have been good for bonds while a Bush win would have been good for equities is an oversimplification.
He says: “No matter who won it will not remove the major issues affecting global growth, a need to sustain growth in the States and avoid a hard landing in China, much-needed stability in energy and raw materials and remedial action on the US twin deficits.”