by Walid Nasserdeen, Analyst & Corporate Strategist
Contrary to popular belief and applied assumption Democrats are the historical victors to the claim ‘better for 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 30′s crash under Hoover, Republican reign produces a gain of 4.7%, still far below the compounded rate of 8.9% produced by their Democratic counterpart. 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 Dem’s would be just over 33k compared to 26k under Republicans. Democrats still fare 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”, 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 Treasury’s under Dem’s 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 Democratic vs. Republican controlled Houses.
Democratic controlled houses also fare better than Republicans, though it should be noted that having one party, either Democrat or Republican, controlling both houses is most favorable to the markets…one house one party is disliked and grafts a history of negative returns
- 'value-weighted portfolio’ ranks stocks in index according to total market value.
- equal-weighted portfolio’ ranks all stocks the same.
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