The Democratic Dividend The stock market prefers Democratic presidents to Republicans. Why? By Carol Vinzant Posted Friday, October 4, 2002, at 4:15 PM PT President George W. Bush inherited the lousy end of the business cycle. The stock market has been falling throughout his entire term, battered by war, a feeble economy, and corporate scandals. Yet this decay still hasn't shaken Americans' faith that Republicans are better for the economy and the market. Poll after poll shows that when Americans divide up the chores of running the country, they tend to think of the economy and stock market as Republican domain and delegate softer issues, like the environment, to Democrats. But Democrats, it turns out, are much better for the stock market than Republicans. Slate ran the numbers and found that since 1900, Democratic presidents have produced a 12.3 percent annual total return on the S&P 500, but Republicans only an 8 percent return. In 2000, the Stock Trader's Almanac, which slices and dices Wall Street performance figures like baseball stats, came up with nearly the same numbers (13.4 percent versus 8.1 percent) by measuring Dow price appreciation. (Most of the 20th century's bear markets, incidentally, have been Republican bear markets: the Crash of '29, the early '70s oil shock, the '87 correction, and the current stall occurred under GOP presidents.) According to almanac editor Jeffrey Hirsch, the presidential party figures are among the most significant he's found. If the stock market were random, we'd expect such a result only one-quarter of the time. "I don't know why people are convinced Republicans are good for the stock market," Hirsch says. Nor does having a Republican Congress help the market. A Democratic Senate showed returns of 10.5 percent (versus 9.4 percent for a GOP upper chamber), and a Democratic House returned 10.9 percent versus 8.1 percent for the Republicans. When both houses of Congress opposed the president, the return was a stellar 12.9 percent. Libertarians may celebrate this as proof that the market likes gridlock and government inaction. But the market likes steamrollers nearly as much: The S&P performs almost as well—returning 11.8 percent—when the presidency and both houses are held by the same party. The only situation Mr. Market dislikes is what we have now: one house for each party. Those years have a -0.9 percent return. Republicans are no doubt muttering that that's just the stock market, not the whole economy. But real GDP growth follows the same pattern. Since 1930 (the first year decent data is available), GDP growth was 5.4 percent for Democratic presidents and 1.6 percent for Republicans. There may be all sorts of explanations for the bias of the economy and the markets toward Democrats. The worst years of the Great Depression occurred under Republican Herbert Hoover, and Democrats got credit for the entire recovery. Democrats had some awfully good streaks of peace and prosperity in the '30s, late '40s, and '90s. These could be chance, or it could be that Democrats more tightly regulate the markets, which gives investors confidence. Democrats are more likely to spread the wealth around through public spending on education or transportation, which may stimulate the economy more broadly. The foundation of recent GOP economic policy—tax cuts—may offer narrower benefits than Republicans claim. High defense spending, another GOP hallmark, may only boost one sector while hurting the whole economy in the form of bigger federal deficits and higher interest rates. Whatever the reasons for it, this Democratic dividend should encourage the party's 2004 presidential contenders. They have a new slogan to run on: Democrats—the party of Wall Street.
The economic downturn has nothing to do with who's in the White House. Do you think that Nortel and Lucent stocks would still be listed on Nasdaq if Gore were in office? Would those worthless IPOs pumped full of VC still be rising? I consider myself a fiscal Conservative and a social Liberal.
Excellent points. It has gotten to the point where it seems futile to attempt to explain the business cycle to people. 40 years ago an article could easily have been written claiming that the market preferred Republicans due to the prosperity during Eisenhower's Presidency. Both theories are bogus. Once a decade there is a deep recession in this country. Just so happens that the recession the last two times have come during Republican Presidencies. It's a coincidence. If you'll look back...the market really started taking a dive during the period when we didn't know who was going to be President. It simply has never recovered. Of course Enron and similar debacles (the corporate practices were going on during Clinton's watch and were revealed when Bush took office) were going to happen regardless of who was in the White House. This article is flawed from the perspective of business fundamentals.
A major error in the analysis would be the assumption that 'If the stock market were random, we'd expect such a result only one-quarter of the time'. The error is that the other side of the equation is not random at all; i.e who the public votes for and puts into office. When financial times are good, bad, threatening, etc., they may be more inclined to swing Democrat or Republican. Another issue that also creates a problem with this analysis is that the impact of much of what is done in DC isn't 'felt' in the economy for years, so if the public likes to follow a president from one party with one from the other, they will inherit much of the prior party's economic impact. Also, how about outliers? In analysis, unless it can be proven that there is a fundamental correlation between the dependent and independent variables, you exclude outliers. E.g., assuming that the Crash of '29 was due to both parties, does the entire analysis swing the other way if the Crash of '29 is excluded? Just looking stupidly at statistical history does not prove cause-effect. Isn't there a historical correlation between the President's party and who will win the Super Bowl? Another example of 'dumb' statistics: Everyone believes that the Republican party is more hawkish, yet there were Democrat Presidents in the White House for the start of World War I, World War II, the Korean War and Vietnam. Are the Democrats warmongers? I despise stupid analysis.
How dare you call me a dupe! I think this piece is pure fluff and thought folks might get a kick out of the reading. Clearly the way things fell out over the last 100 years or so is coincidental. Or is it?
