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Presidents in Play on Pennsylvania Avenue: If Donkeys H​ad Trunks ...

January 15, 2009 By:
Michael L. Schwartz, J Feature
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With the presidential election over, and inauguration this coming Tuesday, speculation of how the electoral votes would add up has given way to debates on whether the multiple government-sponsored bailouts will be enough to rescue our faltering economy.

The economic crisis will certainly be at the forefront of President-elect Barack Obama's agenda as he takes office, and it's likely the pundits will persist with their predictions on how the new administration and a Democratic-controlled Congress will affect the market.

Conventional wisdom holds that D.C. gridlock -- a Democratic president and Republican-controlled Congress or vice versa -- is best for markets. The idea there is that neither party has the power to make the sweeping policy changes that can cause significant market gyrations.

However, according to data compiled by the research firm Bespoke Investment Group in Harrison, N.Y., in the seven periods when Democrats had complete control of U.S. political power, the S&P 500 rose 14.7 percent on average while in the eight times a Republican served as president and Democrats controlled Congress, the benchmark index rose 7.4 percent.

So much for conventional wisdom.

Interestingly, with the industry's constant disclaimer that history cannot predict future performance as a backdrop, there are numerous recent studies that attempt to do just that and predict how the new administration and Congress will fare in dealing with our nation's recently declared recession and record budget deficit.

In his opinion piece, "Divided Government Is Best for the Market," published in The Wall Street Journal prior to the election, Donald Luskin begins his analysis of whether the economy historically has done better under Democrats or Republicans by stating, "There is no shortage of exaggerated claims on both sides."

When the chief investment officer at Trend Macrolytics LLC ran the numbers, he found, since 1948, that the Standard & Poor's 500 total return (capital gains plus dividends) has averaged 15.6 percent when a Democrat was in the White House and only 11.1 percent when a Republican was in the White House. In terms of real gross domestic product, he found, under Democratic presidents, that the average, since 1948, has been 4.2 percent. Under Republican presidents, it has been only 2.8 percent.

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However, moving beyond political labels, Luskin notes that not all Democrats act like Democrats, and not all Republicans act like Republicans. He writes, "John F. Kennedy, for example, was an enthusiastic supply-side tax cutter and George H.W. Bush raised taxes. Bill Clinton promoted free trade and Richard Nixon imposed wage and price controls."

With that in mind, Luskin assigns those four presidents to the opposite party and finds numbers completely reverse themselves. That is, stocks average 14.7 percent under Republicans and only 10.5 percent under Democrats, going back to 1948. In fact, he points out that just one switch -- making Richard Nixon into a Democrat -- is enough to reverse the numbers and have stocks averaging 14 percent under Republicans and only 12.1 percent under Democrats.

Writes Luskin, "This fact discredits this whole study more than it does Republicans or even Richard Nixon himself. Any analysis that can be undone by omitting or changing a single data point isn't very robust."

Of course, the president alone cannot determine the direction of the stock market or enact new taxes. Congress makes the laws. And, you guessed it, there are plenty of studies that look at market performance based on who's in control on Capitol Hill.

According to Luskin, under Republican Congresses, stocks have averaged a 19 percent return, under Democratic congresses only 11.9 percent.

Party politics aside, there's ample analysis on how the market reacts when Americans go to the polls and when a new president takes office. For example, in the last 20 election years, not including 2008, there have been only two years where the S&P 500 Index had a negative return. In 1940, when Franklin D. Roosevelt faced Wendell Willkie, the S&P lost 9.8 percent, and, in the 2000 contest, when Bush ran against Al Gore, the S&P lost 9.1 percent.

Further, Marshall D. Nickles' "Presidential Elections and Stock Market Cycles" finds an initial post-inaugural slide is followed by strong performance. Investigating presidential election cycles from 1941 through 2000, he discovered stock market lows occurred surprisingly close to mid-year Congressional elections or approximately two years before presidential elections.

Another study, "Mapping the Presidential Election Cycle in U.S. Stock Markets," by Wing-Keung Wong of the National University of Singapore, and Michael McAleer, University of Western Australia, shows that in the almost four decades from January 1965 through December 2003, U.S. stock prices closely followed the presidential election cycle.

Specifically, stock prices fell during the first half of a presidency, reached a trough in the second year, rose during the second half of a presidency, and reached a peak in the third or fourth year. In fact, the researchers showed this cyclical trend holds true for the greater part of the last 10 administrations, from President Lyndon Johnson to President George W. Bush, particularly when the incumbent is a Republican.

Experts in the field of behavioral finance identify the harmful tendency to identify patterns and project them into the future as "oversimplification."

Bottom line? Sure, the studies and statistics are interesting, but the data should not affect your investment decisions.

Michael L. Schwartz, RFC, CFS, CSA, is president of a Jenkintown-based wealth management firm. He can be reached at: mike@ schwartzfinancial.com.

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