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Which Candidate is Best for Your Portfolio?

September 10, 2008
Andrew Mickey

Andrew Mickey

8 followers
To say uncertainty is dragging down the markets is an understatement. The financial crisis continues to unravel in the United States. Every financial commentator is talking up the U.S. government’s list of more than 100 “problem banks.”

Fears of another Asian financial crisis are gaining steam. The Thai baht, the Russian ruble, and the Chinese yuan are all well off their highs and in a downtrend. Even commodities are getting rocked. Precious metal, oil, natural gas, and base metals are all in freefall.

Yet there are some surprises...

The U.S. dollar has had a solid month-long upswing and has resumed its place as the safety currency of choice. Who would have predicted that two months ago?

Over this landscape of uncertainty is a hotly contested election. We’re entering the final leg of the U.S. Presidential election and it looks like it’s going to come down to the wire. The latest Gallup poll has McCain/Palin edging out Obama/Biden by a relatively slim 4%(with a 3% margin of error).

Over the next two months, we’re going to hear a lot about which candidate is better for the stock market and how to get positioned for whoever wins. We’ll be told to sell medical industry stocks in anticipation of Obama’s national healthcare system. Or we’ll get told to buy oil stocks if the McCain/Palin ticket swings into the lead.

Regardless of who eventually wins, we’ll have the same old problems hanging over the markets…financial crisis, recession, inflation, etc. Either candidate will have to deal with it. But a lot of investors might be pulling for Obama.

Why? The answer is because the stock market does better when a Democrat is sitting in the Oval Office. CNN says, “The stock market performs better and tends to be less volatile when Democrats are in power.”

In this case, CNN is right. But should we be pulling for an Obama win just to help get the markets turned around? If we look at the historical returns of presidents from different parties, the answer may surprise you.

When it comes to the stock market, there is no better historian than Dr. Jeremy Siegel. The University of Pennsylvania professor has compiled data on the U.S. market back into the 1800’s. In his book, Stocks for the Long Run (a must read for any investor) Siegel reveals the impact of a President’s party affiliation.

Dr. Siegel has discovered the following:

Stock Market Performance and the U.S. Presidents

Stock Market Performance and the U.S. Presidents

Time Frame

Political Party

Average Annual Return

1888 to now

Democrat

10.85%

1888 to now

Republican

8.25%

1948 to now

Democrat

15.26%

1948 to now

Republican

9.01%



The data suggests that our brokerage accounts would be healthier with President Obama. But these historical numbers don’t tell the whole story.

For instance, Republican President Herbert Hoover officially took office January of 1929. That’s nine months before the worst crash in U.S. stock market history. During his four year term the stock market fell about 80%. Hoover stayed in office until January of 1933, the same year the stock market finally hit rock bottom. The market averaged a 20% loss per year during Hoover’s presidency.

Democrat Franklin Roosevelt moved into The White House close to the stock market bottom.

Under Hoover, every 100 dollars invested in the stock market was worth $20 at the end of it. Under Roosevelt, the stock market slowly climbed back to its previous 1929 highs and. The market took 13 years to return to pre-crash highs, but since Roosevelt came in at just the right time, the market returned about 400% over his four terms. That would make every $20 invested at the start of Roosevelt’s presidency worth about $100 at the end.

In reality, the $100 an investor had in the market when Hoover took over would have just been about $100 at the end of Roosevelt’s presidency.

Roosevelt came in at exactly the right time. The difference in returns (an 80% loss in four years compared to a 400% gains in 13 years) has a big impact when we look at returns over the past 20 years. Considering there’s only a 2.6% average difference in annual returns, that one 17-year huge price swing accounts for a big part of the difference.

Also, we’ve got to consider President Bill Clinton rode the tech-bubble to astounding annual returns. And, of course by luck of the draw, he got out just two months before the March 2001 peak. Republican Richard Nixon was in office during the early 70’s bear market as well and resigned at the worst possible time from a stock market valuation perspective.

In short, Republicans get the boot at the bottom and Democrats come in and ride the inevitable return.

But are the democrats causing the stock market to rebound? If so, how? Is it their policies? Their ability to instill confidence in the U.S. economy? Or have they been just lucky? Not even the biggest Bush-hater would suggest that his policies triggered the dot.com crash.

Frankly, it’s a tough one to call. History moves in big waves, sweeping everything with it, including Presidents. But one thing we can tell from additional data: when the same political party controls both the presidency and congress, it’s not good news for the stock market.

When the same party rules over all of Washington, the average annual return for the stock market is only 11.83%.

It’s a much different story when one party controls congress and the other the presidency. The average annual return of the stock market when during these periods is a respectable 16.34%.

My conclusion is that the choice of President doesn’t really matter that much to the stock market. Technically, the Democrats do have a slight edge, but the flukey timing of the great depression and the dot.com crash accounts for most of this “edge”.

Don’t let the presidential elections worry you or impact the decisions you make. There’s too much other stuff that actually has a significant impact on the market. Right now, unemployment is surging to its highest point in four years, every expert calling for another “shoe to drop” in the financial sector, and investors’ uncertainty is rising each day…that stuff actually matters.

Stocks are very cheap and it seems everyone is selling. Everyone is getting nervous. This is the time I buy stocks. I’m not the only one though. David Dreman is making the best of the current uncertainty. Dreman manages about $15 billion and made his mark as a leading contrarian investor by recommending going long stocks in the early 80’s right as the markets were starting a multi-decade bull run.

Dreman recently stated, “Between inflation and the liquidity crisis, this is one of the toughest markets I’ve seen. But it’s not a market you sell into. Any losses you take by being too early will be more than offset by buying cheaply.”

The best investors in the world aren’t letting emotions rule their decisions and you shouldn’t either. Buy great companies selling at discount prices, everything else will work out. It always has regardless of which party controls Washington.

Good investing,

Andrew Mickey

Chief Investment Strategist, Q1 Publishing

About the author:

Andrew Mickey
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.7/5 (7 votes)

Comments

commodity
Commodity - 5 years ago
If you bought on margin and most did

you were broke forever.

When markets crash nobody has any money to buy the

bargains. They just lost it.
adamcz
Adamcz - 5 years ago
Whichever president will bring more oversight and transparency to the markets is better for my portfolio. The less of a "black box" the market is, the more prices will be controlled by the economics of the underlying business, which would greatly assist several of the securities I own (including one in particular which has over 100% of the float shorted) and my strategy in general (buying great businesses and being able to trust the numbers I base those decisions on).
kfh227
Kfh227 premium member - 5 years ago
adam,

What stock do you own that has that much short interest?
sabonis
Sabonis premium member - 5 years ago
You can put lipstick on a bear market...
DaveinHackensack
DaveinHackensack - 5 years ago
Presidents have relatively little power when it comes to domestic policy in general, and economic policy in particular in our system. They don't have the power to raise or lower taxes, or to raise or lower spending on their own. They don't control interest rates. Their power of appointment only extends to the top of the pyramid of the bureaucracy in the relevant departments.

That's one reason it makes little sense to look for correlations based solely on which party controls the presidency (it would make more sense to look at this in the context of which party controls Congress as well). Another reason it makes little sense to do so is because there are fairly wide differences in positions within the parties. Eisenhower had far different ideas about what sort of economic policies to pursue than Reagan did, for example; you could draw a similar contrast between, say, LBJ and Clinton.

One thing that seems certain this year is that whoever wins the presidency, Dems will continue to control the House and Senate. So if McCain gets elected, we'll have divided government and probably fairly centrist policies resulting from the compromises he'd have to make with a Dem-controlled Congress to get bills passed. If Obama gets elected, there may be more of a temptation on his part and on the part of Congressional Dems to steer economic policies further to the left. Even in this case though, it's unlikely we'd see huge permanent changes (e.g., a large expansion of entitlements with some sort of universal health insurance plan), simply because the budget won't support it.
adamcz
Adamcz - 5 years ago
kfh, I just made a thread about it - it's JOSB.

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