Which Party Is Better for Stocks?

by Jeremy Siegel, Ph.D.
Posted on Friday, August 29, 2008, 12:00AM
YahooFinance.com

I would venture to say that most investors, especially those with substantial portfolios, are Republicans. After all, the GOP is the party that champions free markets, capital accumulation, and low taxes, principles that appeal to wealthy investors.

And historically, the initial reaction of the market to a Republican presidential victory confirms this thesis. During the last 120 years, the Dow Jones Industrial Average rose 0.7% on the day following a Republican victory in the presidential elections while it has fallen 0.5% the day after a Democrat captured the White House

However, a closer look tells a far different story. Over that same 120 year period, the average annual stock market return has totaled only 8.25% under Republican rule, while it has returned 10.85% with Democrats in power.

Over the past 60 years, this trend has been more pronounced. The Democrats have held the presidency only 41% of that time, but under their rule the average annual return has been 15.26%, more than six percentage points higher than the 9.01% return under Republicans.

Good and Bad Presidencies

Returns during the last two administrations support these conclusions. The return on the market under the Clinton administration (1992-2000) was 19% per year, the highest of any president since Calvin Coolidge led the country in the mid 1920s.

On the contrary, the real return so far under G.W. Bush has been a measly 0.22%, and an even worse minus 2.69% return once inflation is subtracted. This return is the second worst of the postwar period, exceeded only by the negative 7% real return under the Nixon administration. In fact the Nixon and Bush Republican administrations were the only two periods since The Great Depression when shareholders suffered after-inflation losses in the stock market.

The worst real stock returns over the last 120 years were suffered under Hoover, who captured the White House on November 6, 1928. That was not a propitious time to start investing in stocks. Less than a year later, the Great Stock Crash overwhelmed equities and the subsequent bear market eventually drove down stock prices a record 89%. Investors who bought stock when Hoover was elected lost more than 20% per year before he was voted out of office in November 1932.

The stock market under Democrat Franklin Roosevelt, who was much despised by Republicans and other free-marketers during his record 13-year hold on the presidency, actually did well. Stocks experienced real returns of nearly 9% a year from 1932 to 1945, considerably above the 6.5% average real returns on the market. Returns under Roosevelt were good since he became president when stock prices were low and the US was wrapping up its victory in World War II when Roosevelt suddenly died.

Gridlock Is Good

But who controls the presidency is not the only influence on stock returns. Congress also turns out to be very important. And despite all the hand-wringing about Congressional gridlock, the market does best when Congress is controlled by a different party than the presidency.

Here are the facts. Since 1948, stock returns have averaged 13.89% when there has been a Democratic Congress and a Democratic President. But returns have been a whopping 22.4% when there has been a Democratic president and the opposition Republicans have controlled the Congress.

The same phenomenon occurs when the Republicans have occupied the White House. Returns have averaged only 9.77% when the Republicans controlled Congress as well as the presidency. But these returns were boosted to 10.76% when the opposition Democrats controlled both the House and the Senate and a robust 16% when Congress was split between the Democrats and Republicans.

This means that the margin by which stock returns under Democratic presidents beat the returns under Republicans is cut in half when the same party controls both Congress and the White House.

Lessons for the Upcoming Elections

Since Congress is certain to stay Democratic after this November’s election, it might be good for the stock market to have a Republican president. Keeping a check on a free-spending Congress is in investors’ interests.

But remember, elections are far from the only factor influencing stock returns. The 2000-2002 bear market that followed the technology bubble would have been equally disastrous even if Al Gore received a few more votes in Florida and had been selected president in November 2000. And Hoover’s fate was sealed once the market hit speculative highs in 1929.

So don’t time the market to the elections. Studies have shown that buying stocks when prices are reasonable, as they are now, will be a long-run winning strategy no matter who is elected president.