Are Democrats Better for Markets?

by Rob Viglione

In an article posted on Yahoo Finance (9/5) by economist Jeremy Siegel, data point to the fact that stock markets have done better when Democrats were president. This may be shocking to Republicans, who strongly believe their party is better for markets, but histoical returns paint a different picture. Average annual returns for Democrats were about 11%, compared to just over 8% for Republicans. What caused this reversal in the generally held belief that Republicans are better for the economy?

One of the most important lessons from stats class is that correlation does not mean causation. This means that stocks going up may have absolutely nothing to do with which party controls the White House.

More specifically, consider the following two instances and decide for yourself: In 1928 Herbert Hoover (Republican) took office during the height of a speculative stock market bubble. The following year the bubble shatters and we have the great crash of ’29. Did Hoover have anything to do with that? Not likely since he came to power at the peak of a frenzied speculative bubble.

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.

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