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Confessions of a Money Manager: Which party is better for the stock market?

Ray Unger  —  9/08/2008 6:41 am

Well, investors, we're in the soup again. The presidential election has officially started, and we haven't a clue -- currently it's a statistical dead heat -- who will occupy the Oval Office next January.

Nor do we know what will happen with the economy, interest rates, taxes, gasoline prices, or where the next hurricane will make a landfall. With the Russians invading Georgia, we're just not too confident of anything anymore.

Nonetheless, we march on because regardless of how cloudy our crystal ball might be, we still have assets to invest and markets to analyze. Now that we're engaged in a national election, maybe we can glean something by looking at past presidential races and how the market either reacted to them, or prepared for them.

With the Internet, it's pretty easy to find documentation about past presidential races and the stock market. In fact, that was my first stop on Google: presidential election, stock market. I found an interesting article authored by Marshall D. Nickles of the Graziadio School of Business at Pepperdine University. You can see his full report at gbr.pepperdine.edu/043/stocks.html.

I won't recount Nickles' full report, but I will comment on something very interesting. During 13 of the 16 presidential cycles listed, the market suffered a bear market and bottomed during the second year of each presidential term.

Since Nickles' article was written before 2006, he couldn't include the market's performance during George Bush's second term. This time around, the market bottomed during the first year of his administration, and that trough turned out to be rather benign.

Ned Davis Research (www.ndr.com/invest/public/publichome.action) is a Venice, Fla,,-based stock market research firm that's known for its exhaustive number crunching skills. They recently issued a report to their clients -- this news came via Mark Hulbert of MarketWatch -- that revealed the performance of the stock market during Democratic and Republican presidencies. According to Davis, under Democratic presidents, the stock market experienced an annual average return of 7.2 percent. During Republican presidencies, the return was only 3.6 percent. The research also noted that when Democrats controlled the White House, there was a bit more inflation, but even after that adjustment, the Democrats still showed a 2.5 percent advantage.

Not to confuse the issue, but Ned Davis Research also went the extra mile to determine what the market did when the White House changed hands. They calculated the returns after the incumbent parties won or lost the presidency. Here, we see a different picture. From 1900 to 2004, when the incumbent party succeeded in holding on to the White House, the market experienced an average return of just more than 11 percent. When the incumbent party lost, the market lost roughly 2 percent. During the entire period from 1900 to 2004, the market averaged an annual gain of 7 percent.

That presents us with a conundrum: The market does better with Democrats, but they're not the incumbent party. So if the Republicans lose, do we have further losses to look forward to? But if the Democrats win, shouldn't we have a rising market?

The historical evidence on this subject is quite interesting, and very revealing. It's like the line from the movie "Anchorman: The Legend of Ron Burgundy;" "60 percent of the time, it works every time."

Ray Unger is chairman of Forward Investment Advisors in Madison. He can be reached at 833-9400.

Ray Unger  —  9/08/2008 6:41 am