Judging by historical returns Democrats are much better for markets! In an article published by economist Jeremy Siegal on Yahoo Finance (9/5/08), the presidential administrations over the last 120 years were evaluated against stock market returns. On average, markets have risen 10.9% when the reigning presidents were Democrats, while only 8.3% when Repubicans were in charge. Conventional wisdom is that Republicans are stronger on the economy, while Democrats tend to be further to the Left ideologically. How is it, then, that Democrats dominate markets?



Everyone who has taken a statistics course (or stayed awake in one, for that matter) knows that correlation does not 100% of the time mean causation. Simply put, stocks going up might have absolutely nothing to do with the presidency. A good example would be to equate the stock market with the number of clouds in the sky. One could collect data that just happens to suggest the cloudier the sky the worse the market. In this dataset, markets and cloud cover are correlated, but no sane person would bet his life savings on the cloud cover.

Republican president Herbert Hoover came to office in 1928, at the peak of a speculative stock bubble. People were frantic about playing the markets, bidding up prices and falling prey to outright fraud in many instances. Herbert Hoover had nothing to do with the econonomic circumstances before he came to office, yet his administration witnessed one of the most severe stock crashes in history! If a Democrat happened to be in office at the time, that crash would have been on their record.

The internet sparked an economic revolution that drove stock markets to insane peaks towards the end of the 1990's. "Dot-com" start-up valuations were often higher than profitable, long-established companies. Everyone wanted to get into the market and they all thought they could make quick and easy fortunes. Bill Clinton (Democrat) came to office during this period, but it would be hard to say that he had anything to do with what transpired. The internet would have still transformed the world and markets would have still gone nuts with a Republican in office.

Serious investors understand that betting on presidential cycles is a losing proposition. There are a million things that can impact markets - the President perhaps being one of those - but to attribute better stewardship of the economy (and markets) to Democrats based on historical market return data is premature. The major global events that shaped markets over the last century would likely have occurred regardless of which party held office.