U.S. Stock Bulls Best Served By Democratic Victory, Past Shows

By Michael Tsang and Eric Martin
Enlarge Image/Details

Oct. 29 (Bloomberg) -- Investors speculating on a rebound in U.S. stocks may have a better chance in the first year of a Barack Obama presidency than a John McCain administration, if election history is any guide.

Since 1900, the Dow Jones Industrial Average rose 9.8 percent in the 12 months after the Democratic Party captured the White House, based on the median change following the election of seven Democrats from Woodrow Wilson to Bill Clinton. Only twice did the average decline, after Wilson's victory in 1912 and Jimmy Carter's in 1976.

Among newly elected Republicans, five -- including Herbert Hoover, Richard Nixon and George W. Bush -- preceded stock-market declines, with a median retreat of 2.5 percent for all 10, data compiled by Bloomberg show. The data excludes incumbents that won re-election. Overall, the Dow average generated a median 33 percent advance from the time a Democrat is elected in November or elevated from the vice presidency until the next president is chosen. For Republicans, the gain is 17 percent.

``It's ironic because most people think the market tends to do better under Republicans than Democrats, and the actual empirical evidence has been the opposite,'' said Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees $30 billion. ``There's conventional wisdom, and then there are the pure facts.''

1930s Redux

Whoever wins next week's presidential election between Obama, the Democratic candidate, and Republican nominee McCain will inherit an economy staggered by the worst financial crisis since the Great Depression, a deficit that may exceed $1 trillion for the first time and the steepest annual decline in the Dow average since the 1930s.

The Dow has plummeted 32 percent this year, helping wipe out more than $6 trillion from the value of U.S. equities.

Stocks outperform during Democratic administrations because their candidates, usually viewed by investors as supporting higher taxes and regulation, water down policies once in office, according to billionaire investor Kenneth Fisher.

Meanwhile, Republicans often fall short of their own promises for smaller government, laissez-faire economic policies and lower taxes in the face of Democratic opposition, he said.

``The Democrat isn't as bad as people fear,'' said Fisher, who oversees about $32 billion as chief executive officer of Fisher Investments Inc. in Woodside, California. ``The Republican isn't as good as people hope he'll be.''

Opinion Polls

Increased transparency from better enforcement and regulation of the financial markets -- which Democrats often support -- also helps bolster investor confidence, Arthur Levitt, former chairman of the Securities and Exchange Commission, said after the collapse of Bear Stearns Cos. in March.

Polls show Obama ahead of McCain as the economy looms as the main concern among voters. Obama, 47, widened his lead to 8 percentage points over McCain, 72, in an average of polls released in the last week, according to RealClearPolitics.com.

The previous week, Obama was up about 6 points on average. Fifty-three percent said Obama is better able to improve economic conditions, versus 32 percent who said the same about McCain, a Pew Research Center poll released last week showed.

Online bettors predict an Obama victory that would be the biggest since 1996. He will pick up 364 Electoral College votes, surpassing the 270 needed to claim the presidency, and win in Virginia, Ohio, Florida, and Pennsylvania, Dublin-based Intrade's political futures market shows. Traders are betting McCain, an Arizona Republican, will garner 174 electoral votes.

Fast Money

Wall Street also favors Obama. His campaign garnered $12.7 million in donations from the securities and investment industry, 59 percent more than the $8 million for McCain, according to the Center for Responsive Politics.

A Democratic victory doesn't ensure stocks will escape setbacks after the first year, especially if 2008 turns out to be more like 1932 than 1992.

Franklin D. Roosevelt won a landslide victory over Hoover in 1932 at the start of the Great Depression, which put one in four Americans out of work and caused the economy to contract by 46 percent. The Dow average jumped 48 percent in the next 12 months as Roosevelt implemented his New Deal programs.

Still, over Roosevelt's whole administration, stocks endured seven bear-market declines of at least 20 percent.

In 1992, Clinton defeated George H.W. Bush using the mantra ``It's the economy, stupid,'' after the U.S. suffered its worst recession in a decade a year earlier.

Clinton, Coolidge, Reagan

The Dow more than tripled in the eight years following Clinton's election, the biggest increase of any presidency since the start of 20th century, data compiled by Bloomberg show.

Pioneer Investment Management's John Carey says political leadership has little influence on the stock market and gains or losses during a president's administration are more often a result of the business cycle than policy decisions.

Carey cites the Internet bubble of the 1990s, which inflated stock returns under Clinton before bursting when George W. Bush took office. The Dow's 17 percent drop since Bush's 2000 election is the third worst since the start of 20th century, behind the 75 percent plunge under Hoover and an 18 percent drop for Nixon.

Clinton is one of only two presidents since 1900 to avoid both a major war and a recession. The other was Calvin Coolidge, the Republican whose victory in 1924 preceded the Dow's biggest 12-month rally to follow an election.

Meanwhile, Ronald Reagan's election in 1980 preceded a 127 percent gain in the Dow average in the next eight years.

``I don't think there's any rhyme or reason to it,'' said Carey, who helps manage $300 billion in Boston. ``There have been some good markets under Democrats, good markets under Republicans and bad markets under both.''

To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net.