Democrats or Republicans: Who's Better for Wall Street?

Contrary to popular belief and applied assumptions, Democrats are the historical victors to the claim 'better for the stock market'.

Since 1929, both parties have held the presidency for approximately 40 years each. According to The New York Times and data from Bloomberg, during this period the consolidated returns for the S&P under Republican rule give a gain of only 0.4%. If you exclude the 30s crash under Hoover, Republican reign produces a gain of 4.7%, still far below the compounded rate of 8.9% produced by their Democratic counterparts. Over that time, a theoretical $10,000 investment in the S&P over Democratic rule would have grown to over $300,000. Under Republican rule, the same $10,000 investment would be just over $51,000 today...and putting Hoover back in the mix dwindles your return leaving you with only $11,733.

Some will point out that there are countless factors in the production of market returns and the validity of such data are nominal at best. While this is understood,  no one should discount 40 years of consistent historical data.

A more technical look is given by Yale and Jeffrey Hirsch in the Stock Trader's Almanac showing a Dow Jones Industrial $10k investment compounded during Democratic reign since 1901 would have grown to over $279k after 48 years. The same $10k investment during 56 Republican years would be worth just over $78k. The dull glimmer of Republican reign comes with the appearance of inflation. Adjusted for inflation, your 10k investment under the Dems would be just over 33k compared to 26k under Republicans. Democrats still fair better but the margin between is greatly reduced.

The research takes new light when running the same test against GDP. A similar pattern emerges as Democratic presidents produced a 5.4% GDP growth, contrasted by the Republicans' 1.6%.

Pedro Santa-Clara and Rossen Valkanov, finance professors at UCLA, decided to further test the above theory using weighted portfolios and broad based indexes.  According to their paper, entitled, "The Presidential Puzzle: Political Cycles and the Stock Market" and published in the October issue of the Journal of Finance, stock market returns are on average about 5 percent higher when the White House is run by a Democrat than during Republican rule.

According to the UCLA professors, reduction in volatility was also affected positively under Democratic rule. Between 1927-1999, the study shows broad based indexes returning an average of 11% annually over 3-month Treasurys under Democrats, as opposed to the Republicans' 2% average. Controlled portfolios (value (1) & equal weighted (2)) under the UCLA study also validated the theory of Democrats being better for the Stock Market than Republicans. On average, over 72 years, the value-weighted portfolio returned 9% more, and the equal-weighted portfolio 16% more, under Democrats than Republicans.

The irony in all of this is that it may be the myth that Republicans are better for the market that causes Democratic linked market gains to be so much greater.

Investors buy into the Republican-market myth and start off with 'pain on the brain' when a Democrat is elected. This results in lower expectations early but euphoric surprise by democratic policies and economic improvement, thus leading to reactive involvement and sustainable market up-trends throughout the course of a term(s).

The same pattern is also displayed when comparing Democrat vs. Republican controlled chambers.

It should be noted that having one party controlling both houses is a favorable to the markets regardless of political view.

One house one party is disliked and grafts a history of negative returns

Charted data sourced from Bloomberg Financial Markets.

(1) 'Value-weighted portfolio' ranks stocks in index according to total market value. (2) 'Equal-weighted portfolio' ranks all stocks the same.

Sources: The New York Times, Bloomberg Financial Market, & Journal of Finance

Disclosure: Long S&P & Nasdaq.

Comments

[Steven Hansen:]

democrats in the past tended to pump money into the lowest economic strata of citizens through wealth redistribution (spelled 'taxes') and public projects causing the economy to expand. republican policy tended to try to control economic bubbles and fiscal responsibility which tended to moderate economic growth.

but this is no longer true, and i really doubt in this terrible economic times that there would actually be much difference between obama and mccain.

i think bush is probably the worst president in history. But economically he was saddled with 9/11 which was not his doing (giving him the benefit of the doubt). Further, nixon was saddled with the oil embargo. i can think of no other presidents which faced massive external economic disruption other than bush and nixon. so this too distorts the analysis.

and is this not the trillionth article in seekingalpha on this subject??

2008 Oct 31 06:13 AM

[sieraromero:]

If B. Obama is not elected and bush's economic policies are continued under J. McCain, then we are going to be in for some very bad times that we will not be able to climb out of for several generations!

2008 Oct 31 10:46 AM

[cocomurph:]

Try a correlation of the stock market and when a party controls BOTH the Presidency AND Congress ( doesn't matter which party ), versus when control of the two is split. You'll find that the market does best when power is split ( i.e. less governmental action ) than when EITHER party controls both.

2008 Oct 31 11:13 AM

[THofler:]

Two corrections are necessary for any meaningful analysis.
1) Apply an 18 month delay time to the White House transition dates. While the market psychology may change overnight, real economic factors do not.
2) Don't compare Dems. & Rep. presidents; instead compare fiscal conservatives vs. fiscal liberals. This would move Kennedy into the conservative column and Nixon (& Ford?) into the liberal column.

2008 Nov 01 11:40 PM

[User 292056:]

On Oct 31 10:46 AM sieraromero wrote:

> If B. Obama is not elected and bush's economic policies are continued
> under J. McCain, then we are going to be in for some very bad times
> that we will not be able to climb out of for several generations!


How right you are! Bush spent too much.

But then, Obama will spend much more than Bush. He should put into a position similar to what FDR's was in back in 29. Just like FDR he can turn a difficult recession into a full blown depression. Fortunately we had a world war to pull us out of that government created abiss. Good news for those of us who are about to become citizens of the USSA... Obama's weak defense policy should make it more likely that we get saved by a nuclear attack. After it's all over we will find that the rich and powerful are richer and more powerful, just like before.

2008 Nov 05 12:26 PM