February 13, 2012: Happy Days Are Here Again If The White House Changes Tenants, Or Are They?

With our Presidential election date rapidly approaching, investors naturally are concerned over the impact the current or new residents of the White House might have on financial markets.  There is a general perception that Republican administrations have been resident during better stock market returns than their Democratic opponents, and hence a change at the top by the January 2013 inauguration would be a good sign for investors.  But counterintuitive as it may seem to some, this is not the case. 

Beginning with Harry S. Truman and Dwight D. Eisenhower, Republican administrations have essentially produced a zero average real stock market return.  On the other hand, Democratic denizens at 1600 Pennsylvania Avenue have prevailed during periods that produced a 34% average stock market return.  These figures are based on the average performance of the Standard & Poor’s 500 Index for each four year Presidential term (3 years for President Obama) over the three month U.S. Treasury bill rate.  On an unadjusted basis, the figures tally up to 51% for the Democrats and 24% for the Republicans on the same per-term measure.

Of course, there have been excellent results during many Republican terms, although we have never had a Democratic administration since FDR with negative stock market results.  President Bill Clinton leads the way with his two terms, and President George W. Bush badly trails all others, with a negative 8% in his first term and minus 25% in term two.  The table below shows these results for the past 62 years.

It is difficult to make much sense of these statistics, and it is obviously dangerous to base one's investment strategy solely on the party occupying the White House. Perhaps it is the true essence of the stock market as a future discounting mechanism, and a perceived anti-business, administration will surely be followed by a friendlier White House; ipso facto, the market foresees the change in the offing and bids up or deteriorates the market in advance. That theory may have worked some of the time; jimmy Carter at +26%, surely to be followed by a free enterprise Republican (Reagan); and George Bush II at -8% and -25% discounting the return of the Democrats. Admittedly this is a stretch, but investors who are increasingly concerned that another four years of the Obama Administration will lead to financial peril should take heart, regardless of their political persuasion.

Submitted by: Robert L. Meyer, CFA – Managing Director and Portfolio Manager

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