Why Investors Should Hope a Democrat is the Next President

© Bryan Thomas/Getty Images
© Bryan Thomas/Getty Images

One of the best political outcomes for the stock market would be for a Democrat to win the presidential election next year while Congress remains in Republican control.

That’s not a statement of my political desires. It’s a reflection of the stock market’s performance over the past century.

Consider a study conducted by Ned Davis Research, the quantitative-research firm: It measured the Dow Jones Industrial Average’s performance under various political scenarios, ranging from Democrats controlling the White House and both houses of Congress to Republicans dominating — and all combinations in between.

One of the best constellations of political power, according to the study, is for there to be a Democratic president and a Republican Congress. Since 1901, the Dow under those conditions has produced an annualized gain (before dividends) of 9.0%. (See chart above.)

That compares with a 7.3% annualized return when the Democrats control both the White House and Congress, and a 7.0% return when the Republicans dominate both.

© Ned Davis Research
© Ned Davis Research

It might be tempting to conclude from those results that the stock market prefers political deadlock. That certainly accords with the Libertarian notion that the government creates more problems than it solves.

But not all the historical data are consistent with that hypothesis, since not all deadlocked situations in Washington have coincided with an equally strong stock market. Consider those years in which there has been a Republican president and a Democratic Congress: On average, according to the Ned Davis study, the Dow in such years has gained an annual average of only 2.2%.

That’s less than a fourth as much as it performed in the reverse situation that is presumably equally deadlocked, when a Democrat was president and the Republicans controlled Congress. The fact is, as you can see from the chart, the stock market over the past century has performed better when a Democrat has been in the White House.

This difference can’t be explained in terms of inflation, either. Though inflation on average has been higher during Democratic presidencies than Republican ones, even in inflation-adjusted terms the stock market has performed better when a Democrat has been in the White House.

Why Wall Street loves Hillary Clinton, businesses brace for an onslaught of regulations, Harry Reid as power player, and more.

Some readers howled in protest on past occasions when I reported these results. But note carefully that Democrats don’t necessarily deserve the credit for the superior performance of the stock market during their presidencies. It might be, for example, that the stock market during Democratic presidencies is reaping the rewards of the economic discipline imposed during prior Republican presidencies or by the Republican congresses that often accompany Democratic presidencies.

You are entirely free to make such arguments, of course, or interpret the facts in any of a myriad possible alternate ways.

But facts remain facts even when you don’t like them.

Written by Mark Hulbert of MarketWatch

(Source: MarketWatch)

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