Which Party Is Better For the Market?

Interesting study by Ned Davis, via Van Kampen Investments of what the market's look like under different party rule. Rob Schumacher of Van Kampen notes:

In every presidential election year, voters and investors alike focus on the race for the White House, and rightfully so. You see, as shown in the accompanying chart from Ned Davis Research, the historical data depicts market returns that vary greatly under Republican or Democratic leadership.

The same data also suggest that while presidential races may dominate the statistical landscape, a more interesting interaction between politics, the public and stock prices is likely to take shape. And it has very little to do with who wins or who loses.

I am assuming that while there may be correlation between parties and market performance, there is no specific proof of causation, i.e., these policies cause those returns. My second assumption is that the Federal Reserve Chair is more important than Congress or the Presidency to markets. And in terms of data sets, 106 years -- ~26 presidential terms -- is a bit light. This might be really interesting after 500 years, though.

Regardless of those reservations, this is quite fascinating:

Gains (%) for Stocks by Party of the President and Majority Party in Congress
03/04/1901–10/23/2006

The most interesting aspect of the current research into party control has little to do with which party has Congress or the White House -- its when Congress is in session or not:

Using historical pricing on the Dow Jones Industrial Average [DJIA], the Standard and Poor’s 500 Stock Index (S&P 500), the Center for Research in Security Prices [CRSP] Equal-Weighted Returns Index and Value-Weighted Returns Index,4 Ferguson and Witte find that, “Depending on the index, daily returns when Congress is in session range from 1 to 4 basis points per day. When Congress is out of session returns range from 5 to 15 basis points a day.”

Media spin aside, in a striking conclusion Ferguson and Witte remind their readers that, “Fully 90 percent of the historical capital gains on the DJIA occurred on days when Congress was out of session

We are tempted to make the tongue-in-cheek observation that when Congress -- of either party -- is in session, it is dangerous to your portfolio's health!

And as we have discussed in the past, it is important to consider Multiple Variables in Market Analysis. Who controls the Congress or Presidency is but one issue out of 100's if not 1,000's, and perhaps a minor one at that...

Comments

[glendokid]

Well, the same size is too small for any meaning, but I'm tickled that the study agrees with Greenspan who said (I think) that it's better to have a congress controlled by the party NOT in the White House - that way the government interferes less with the function of the country.

2006 Oct 31 01:54 PM

[NO DooDahs]

The logical extension of that statement is that the country would function best without any "government."

2006 Nov 02 12:06 PM

[Paul Meisel]

But who would pick up the trash?

I am a little facetious -- but we have become used to government doing many things private citizens used to do, like cleaning up common property, showing some charity for poor people, discouraging vandalism and minor crime.

2006 Nov 06 11:46 AM