Which Party Is Better for Stocks?

06/12/2008 12:00 am EST

Focus: MARKETS

James Stack

President, Stack Financial Management

Jim Stack, president of InvesTech Research, comes up with some surprising numbers on market performance during Democratic and Republican administrations.

[Now that Sen. Barack Obama appears to have clinched the Democratic presidential nomination,] we can expect Wall Street’s debate to soon turn to whether a Democratic or Republican President will be better for investors.

Arguments could be made either way—that Wall Street prefers Republican or Democratic presidents–depending on how the statistics are juggled and what specific time period is analyzed.

For example, something as innocuous as shifting the starting date for one’s analysis from 1932 to 1928 (to include the doomed Herbert Hoover years) would reduce the total return under Republican presidents by 61%! Yet most election studies that were done after the Reagan/Bush years (prior to the Clinton decade) concluded that Republican presidents were better for Wall Street investment returns.

But if these data are broken down into a segmented picture that views each presidential term separately on an annualized return basis, then the picture becomes clearer.

The top five presidential terms, excluding the non-elected three-year term of President Gerald R. Ford, were: Bill Clinton (18.9% annually); Dwight D. Eisenhower (15.3% a year); George H.W. Bush (14.9%); Ronald W. Reagan (14.7%), and Harry S. Truman (14.0%).

That’s three Republicans and two Democrats. So, one might give a slight edge to Republicans in the White House.

But hold on!Note the three worst terms were: Herbert C. Hoover (-20.2% annually); Richard M. Nixon (-0.8% a year), and George W. Bush (1.3%)—all Republicans. So, one might conclude that market disasters and poor performance are more likely under a Republican president.

But stop and think for a moment: Did President Hoover’s missteps and policy mistakes really cause the 1929-32 market slide, or were the imbalances already in place, as many economists argue? Also, was it President Nixon’s fault that interest rates had already risen to all-time record highs before he was inaugurated?

And who could possibly blame the current president for the bear market of 2000-02, when the decline had started eight months before his election and the air that was being let out came from the “irrational exuberance” and high-tech bubble of the late 1990s—created under the Democratic Clinton Administration.

When all the analytical cards are laid on the table, it becomes evident that market gains (or losses) are less dependent on which political party [is in power] or who is elected to the White House, and more reflective of conditions, trends and risks that existed prior to the election. Yet that won’t stop Wall Street or the media from venturing into this quagmire debate in the months between now and November’s election.

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