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With the State of The Union earlier this week and the new Congress coming into session earlier this month, I thought it would be interesting to look at politics and stock market returns.

The New York Times ran an op-ed by Tommy McCall on October 14th 2008 titled "Bulls, Bears, Donkeys and Elephants." The article showed data which indicated that the stock market does far better under Democratic Presidents than Republican presidents, using data from 1929.

The article stated that $10,000.00 invested only during time Democratic control of the White House would have returned $300,671.00. Likewise, that same $10,000.00 invested only when a Republican was president would only have yielded $11,733.00, but to be fair the Times threw in that the $10,000 would have grown to $51,211.00 if the presidency of Herbert Hoover was excluded.

Although I consider myself a centrist on economic issues, this article seemed to be a suspicious opinion piece skewed to get more people to vote for Barrack Obama. At first glance I wondered two things. First, who put Herbert Hoover in charge? And second, how can this difference be so one sided? Investments made during the periods where Republicans are in control are outgained almost at a rate of 25 to 1, and at a rate of 6 to 1 even if you don’t include Herbert Hoover’s reign in a depression. However, I never had the time nor cared to investigate the matter.

I like to listen to Ric Edelman, who has a radio show Sunday mornings. He is a big fan of indexing and does not discuss stocks but is interesting to listen to on topics of asset allocation and personal finance. I never knew of any political party affiliation, but happened to stumble on a very interesting article that Edelman wrote regarding the piece in the New York Times.

Edelman has a few bones to pick with the original article, and does so in a short piece which he summarizes a few of the major flaws of McCall’s article.

First, Edelman wants to remind the readers that these statistics are based upon numbers that are recorded as of day one of a candidate’s presidency. Meaning that if a new party took office today, would the stock market really be an accurate reflection of their policies and political accomplishments, or wouldn’t some of the numbers be slightly attributed to the prior regime’s performance? Can anyone state that President Obama came into office with a booming economy?

Edleman argues that the measures should rather be recorded in a way that weighs the end of a politician’s term and allows for an accurate depiction of what their presidency really produced (he does not state how exactly he calculates it, but as one can see from the rest of the article it is mostly irrelevant). One such model estimated that the $10,000.00 under this model would have yielded $56k or $98k under Republicans and Democrats, respectively.

Second, Edelman points out that the simple model presented in the New York Times doesn’t include any forms of dividends, which is a really dumb mistake that McCall made. If dividends were continuously reinvested, then the $10,000.00 would have grown to $75k under Republican control or $2,000k under Democratic control in that same time period.

A third and major issue is that inflation is ignored as well under this principle, which would change the numbers to $51k for Republicans and $25k for Democrats.

Fourth, Edelman is upset that the time period arbitrarily starts with 1929. He claims that if the period of study started in 1933 instead, the numbers produced would have wound up as $197,043 in Republican times and only $97,724 under Democratic rule.

The major issue of Edelman’s paper is not that any party is better than the other when it comes to having an effect on or investing within the stock market (at least not in this paper anyway). Edelman’s point is that depending on what variables you change as shown in any of the previously mentioned samples, you can skew the data to fit your objective. The four previously listed examples by Edelman (as well as the original by the Times), showed completely different results, only based upon accounting for dividends, changing the time periods, or accounting for inflation.

In fact, Edelman even showed through his examples ways that the market was better under both the republicans and democrats. Should these measures all be accounted for? Yes. Are there even more measures and outliers that could further skew this data? Absolutely. Edelman isn’t trying to be biased; he is actually trying to warn others of bias by showing that numbers and statistics are not friendly at all because they can be changed to “fit” our needs.

The topic in my opinion is rather moot however. The Shiller 10 year PE was 45 when President Clinton left office. For the market to be fairly valued it had to fall 66%. During the entire presidency of George W. Bush the Shiller PE did not get below that level despite a rapid increase in corporate earnings, until the crash in 07/08. This shows that the market can stay irrational for many years. The returns of the stock market many times have nothing to do with who is president.

Right now the Shiller PE is at 23.74 meaning the market is likely to fall sometime in the next few years regardless of who wins in 2012 and possibly 2016. It has nothing to do with Obama, Palin or anyone else.

This is not to argue that one party is better than the other for the economy. I frankly think the Democrats have some great positions and some very dumb positions on economic issues, and the same applies to the GOP.

The point of this article is that the economy can be very disconnected at the stock market at times. This also demonstrates that one can, and unfortunately many people do, skew data for their own political purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Who is Better For the Stock Market: Republicans or Democrats?