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In the 2002 edition of the book, Stocks For The Long Run, Siegel includes a lovely little analysis/study of whether or not the stock market has had higher real returns (so this = after inflation has had its effect) when Republicans vs. Democrats have held the office of the President of the United States.
What exactly did he find from this study? Let's take a look!
Now, I definitely don't want to make this a big political battle, because I am not a very "involved" political person.
However, it is no secret that the stock market in general reacts better to Republicans than Democrats. Republicans pride themselves on being champions for lower capital gains taxes and supporting the businesses that make up the stock market.
Indeed, Siegel's findings support the theory that sentimentally (short-term), the markets do favor Republicans being President as compared to Democrats. This was determined based on the study results showing that since 1888, the market has risen 0.7% (on average) on the day following a Republican victory vs. falling an average of 0.5% the day after a Democrat victory.
This is definitely an interesting finding. However, what is really important is to determine how the market acts during the entire term of having either a Democrat or Republican in Office.
To do this, Siegel and his research team computed the annualized real return (after inflation) during each Presidential term since Harrison became President in 1888. The results of this portion of the analysis are listed below:
- From 1888-2001...
- For Republicans, the annualized nominal return was 8.79%, and the annualized real return was 7.20%.
- For Democrats, the annualized nominal return was 10.84%, and the annualized real return was 6.48%.
- Result = Republicans win. Democrats produce higher stock returns, but also higher inflation. Republican have produced higher real returns since 1888 by 0.72% (so not by much).
- From 1948-2001...(the results are quite different)
- For Republicans, the annualized real return was 6.11%.
- For Democrats, the annualized real return was 11.25%.
- Result = Democrats win by a landslide. To give an idea of the magnitude that this difference in returns would make, if you invest $10,000 in 1948 and assume a 6.11% annual return, your money would have been worth $231,785 in 2001. However, if you had realized an 11.25% return, your same $10,000 would be worth $2.8 million. Wow! That is a huge difference!
So, from these results, we can conclude that during the time that most people reading this blog have been investing, having a Democrat in office has been favorable.
However, since I just have the 2002 version of Siegel's book, I wanted to check up on this and see how our Presidents have performed since then.
Update on Recent Presidents
Just as an example, I pulled up the Google Finance chart of the performance of the S&P500 index during the Clinton presidency. During his terms, the stock market went up 203%.
The same S&P500 chart for G.W Bush's two terms is shown below. During his time in office, the market decreased 29% overall. However, he did have a nice run in the 2007 time frame!
Obama is fairly new to the Presidential office compared to the others. However, the performance of the S&P500 index during his term so far has shown a 44.18% increase (see chart below).
So, it appears that the trend of the markets performing better when Democrats are President vs. when Republicans are in Office has continued.
Will it continue to be this way? As far as this question goes, I don't have any answers, as I am not one to ever try to time/predict the market. As a passive investor, I merely adjust my asset allocation to my targets on a monthly basis based on the fluctuations in the market.
Another thing I don't have an answer to is why Democrats being President cause the markets to do better (at least in the past 60 years)? Because one would think they would do better with Republicans in Office! I need your help to shed some light on this.
How about you all? Why do you think the market has performed better when Democrats are in Office the past 60 years? Is it just residual policies being enacted from when Republicans were there? Is it because Republicans control the Senate/House during this time? Or, is it because Democrat policies enable lower and middle class people to have more money/spend more money?
Share your experiences by commenting below!