To the victor goes a market opportunity

Franklin Roosevelt, (above) with his New Deal, and Ronald Reagan, with his tax cuts, made a difference at the ailing stock markets they inherited, as did their projection of leadership.

The next president is about to inherit an economy in a nose dive and a stock market flat on its back. That's painfully bad news for most of us, but a big opportunity for him.

Compared with other daunting challenges that will face either Barack Obama or John McCain as president, the economy in general and the stock market in particular are fixable. Markets are notoriously difficult to predict, but they almost always rebound from plunging corrections over time. Four years should be plenty.

The current stock market de cline is not historic, but it has been wrenchingly bad. The Dow Jones industrial average has lost 34.5 percent since its peak reached in October 2007. All but one of the Dow average's 30 stocks has lost money this year.

Other presidents who took office with the nation in financial turmoil benefited from the stock market's resilience. Franklin Roosevelt, Ronald Reagan, and even Gerald Ford saw a troubled market begin to rebound in less than four years.

All three of those presidents faced different specific challenges but each inherited stock markets suffering because of serious economic problems when they first took office. Roosevelt famously dealt with the Great Depression of the 1930s. Reagan took office amid a recession and sky-high interest rates of 18 to 20 percent. Ford battled a recession and double-digit inflation rates of the mid-1970s.

The nation's economic problems did not disappear by the end of those terms and the economy remained downright dire in 1936 after Roosevelt's first four years in office. But stock prices had moved sharply higher in each case.

The stock market roughly tripled in value during the first Roosevelt term. The Ford stock market lost ground at first but eventually climbed about 20 percent. The Dow Jones industrials earned a total return of 60 percent during the first Reagan term, which turned out to be the launching pad for one of the 20th century's great bull markets despite the crash of 1987.

One safe bet: We will still be looking at real economic problems at the end of the coming administration's four-year term. But, stock prices will also be significantly higher than today's levels.

History offers a few stock market lessons for the next president. He can help, by trying to stimulate the economy and projecting leadership at a time when confidence matters more than usual. The next president could exercise real power by doing both. But he will also discover the limits to his influence over the market.

"The president is not responsible for the stock market," says Richard Sylla, a market historian and economics professor at New York University. "But if they appear to be in charge and do things to address the country's economic ills, people will rally behind them a little bit. It's almost a psychological thing. People feel good about a new president anyway."

Roosevelt certainly projected leadership as a new president, as did Reagan. What each actually did - launching the New Deal, cutting taxes - also made a difference. But other factors beyond their control were at work, too.

The stock market had fallen so dramatically by the time Roosevelt took office in 1933, it was almost impossible for it to go lower. In fact, stocks had actually bounced off the bottom before he took office. The market soared during Roosevelt's first term, but fell hard after he won reelection. Call that good political timing all the way around.

Reagan came to office in early 1981 pursuing change his admirers called a revolution, but Federal Reserve chairman Paul Volcker was more important to the economy and markets. Volcker drove interest rates sky high to curb dangerous inflation. The strategy worked and the stock market advanced, but the high rates inflicted real pain along the way. Sylla says Reagan advisers worried about the political fallout and initially urged the president to blame everything on Volcker, which he declined to do. Volcker is remembered for bold action, but Reagan also benefited from the stock market boost.

The Ford presidency is such a strange historical period it's hard to know what to make of the stock market's relationship to the White House in those years. After taking office in the summer of 1974, Ford labored to right the economy, campaigning to "Whip Inflation Now," but never seemed completely effective.

Ultimately all three benefited from timing, too. The ups and downs of business are just as important to the stock market as decisions made in the White House. Policies are important, but timing helps.

"An administration can make some difference at the margin with policies," says John Carey, a veteran portfolio manager at Pioneer Investments in Boston. "But I think it's the business cycle that drives the market over long periods of time."

Timing may have helped the stock market of Bill Clinton, who arrived in and departed from Washington under ideal economic circumstances. And perhaps timing hurt President Bush, whose terms spanned the technology stock bust, the Sept. 11, 2001, terrorist attacks, and now this latest financial collapse that can be blamed on so many culpable parties.

Today, financial institutions are under stress around the world. Companies, consumers, and even municipalities find it harder to borrow money. Unemployment is rising and economists worry about a serious recession.

Facing all that, Obama or McCain will also exercise a limited power over the direction of the stock market. But their timing couldn't be better.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.