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The juggernaut that is US politics lumbers towards a Presidential Election, but how will the results affect investors? Russ Mould votes with his wallet

Stock market investors always need to keep a close eye on events at the ballot box. Elections in Russia on March 2 and Spain on March 9 will be of interest to market punters there, and the US Presidential Election due on November 4 which will continue to grab headlines throughout 2008.

The seemingly interminable campaign to find out who will lead the world’s largest economy is now entering its decisive stages, although the flip-flopping results from the Iowa caucus and the New Hampshire primary showed all of the candidates still have a lot of work to do.

• The primaries – Candidates will continue to fight for the nominations to represent the Republican and Democratic parties. Key dates include Florida’s vote on 29 January and Super Tuesday on 5 February, when a number of key states, including New York, California and Illinois, will have their say. Clear front runners should emerge after Super Tuesday, even if the primaries run through until June.

• The conventions – Party delegates selected in the primaries then vote for their respective candidates for the Presidency and Vice Presidency. The Democrat conference will be held in Denver during 25-28 August, while the Republican event follows on 1-4 September in Minneapolis.

• The Presidential Election – After a final burst of canvassing, Americans will vote on the first Tuesday of November. Each state will then appoint electors, who will attend the Electoral College on 15 December to cast their votes for President and Vice President.

• The Inauguration – Congress will provide the final tally of the electors’ votes on 6 January and the new President and Vice-President will be sworn for a four-year term of office on 20 January 2009.

The primary results have suggested the race for the White House is still wide open, particularly as this is the first US poll since 1952 which does not feature either the incumbent President or Vice-President running for office.

Intriguingly, it looks as if stock market punters should be rooting for the Democrat front runners, Hillary Clinton and Barack Obama, rather than the leading Republicans, John McCain, Mitt Romney and Rudy Giuliani. Shares data (see Tables 1 and 2) shows since 1952 the Dow Jones Industrials has, on average, performed best in the first year after an election, and indeed over the full four-year term, if the Democrats have won.

Whoever takes over will certainly have his or her hands full however, as the credit crunch grinds on, oil and agricultural price inflation run apace and the US economy softens. In the end it is growth in the economy, and therefore corporate earnings, which will really dictate how the stock market does. A 31% drop in corporate EPS in 2001, plus the bursting of the TMT bubble, explains why the first George W Bush’s first term in 2001-2004 regime saw such poor stock market performance, for example.

If even telecom giant AT&T (T:NYSE) is blaming consumer spending weakness for a disappointing trading update, a preference for safe, defensive stocks still looks advisable, on both sets of the pond.

Changes to Shares US Portfolio:

BUY Duke Energy (DUK:NYSE), Newmont Mining (NEWM:NYSE), United States Natural Gas Fund (UNG:NYSE)

TAKE PROFITS ExxonMobil (XOM:NYSE)

SELL Cisco (CSCO:NDQ), Corning (GLW:NYSE)