Statistics and Politics

11/24/2008 1:52 pm EST

Focus: STRATEGIES

Tom Busby

Founder and CEO, DTI

Throughout this election year, we have heard a great deal about economic policies of both parties, and many have tried to relate this to the performance of the S&P 500. While I have never really considered myself politically motivated, I have learned a thing or two about the S&P 500. One thing about this contract is that you quickly learn to be a student of the past, and I have been trading futures contracts for about 30 years. The thing that I find most interesting is the way some otherwise intelligent people are pulling up statistics and shaping them to say what they want to hear.

That is the main issue I have with statistics as a whole-they are a bit malleable. For instance, many of you have heard how during the first year, a democrat in the White House coincides typically with a gain in the S&P futures. The truth is that, yes, this is the case, and is especially true when that democrat follows a republican in the White House. The number is interesting, because when we reverse the parties, we find almost the exact opposite to be true. Republican Presidents tend to have bad first years as far as the stock market is concerned.

The really interesting thing for me to look at though is the second year. What has been the performance of republican vs. democratic Presidents in the second year of office? Keep in mind that during the first year, the President is busy formulating policy, and at times, enacting policy. Therefore, it really becomes the second year that these policies take affect. The picture that we see in the second year of presidencies is muddled. Five times since 1952 (two democrats, three Republicans), a second-year President has seen a drop in the S&P 500. That can be compared against the nine times (three democrats, six republicans) a second-year President has seen a gain in the S&P 500. No matter how you spin the news, there does seem to be one thing that both parties can agree on: The third year of a President from any party-since Truman's third year in 1951-has seen positive growth in the S&P 500.

One more item to consider: Only once since 1952 has a President assumed office after a negative year in the S&P 500. That was the current President, and he saw the first two years of his presidency have difficulties. So for the second time since 1952, a President will assume office following a negative year for the S&P 500 during an election year. Stat slingers would like you to take from this that because Mr. Obama is a democrat, the market will go higher. They offer no economic reasons for this. They only offer political reasons. Maybe they did this to win votes. It makes sense and can be a good tactic. Please though, before following the stat slingers, take a look at your personal financial situation.

These markets will respond more to economic considerations than they will to political ones. Despite the feel-good story of Mr. Obama, the basic underlying economic situation has not changed overnight. It could change though, and there will be reasons other than the swearing in of Mr. Obama that will account for this. When making financial decisions, trust those reasons and not the political stat slingers that can show you only that which they want you to see.

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