Does the Market Play Presidential Favorites?
By Sam Stovall
Many on Wall Street--and on Main Street, for that matter--believe the stock market prefers a Republican president. Oddly enough, however, the S&P 500® Index has posted better returns when a Democrat has held the office than a Republican. Since 1929, the S&P 500® has gained an average of 10.1% during each year of a Democratic administration, yet only 3.8% during Republicans' years in office.
Even excluding the Great Depression, Democrats hold the edge. Since 1945, the "500" has risen 10.7% on average each year under Democrats and 7.6% under Republicans.
One reason could be that economic recessions have occurred more frequently during Republican administrations than Democrats'. Since June 1899, there have been 22 recessions--15 (two out of three) beginning while a Republican was president. As the table ablove indicates, when the four-year presidential cycle is broken apart we find the early years to be more challenging than the latter years, particularly for Republicans. Again, this pattern could be the result of recessions coming early in different administrations. I will leave it up to the reader to decide if that is the result of inheriting a predecessor's problems or the new president's own mismanagement.
Should investors infer from this that, statistically speaking, they would be better off under a John Kerry presidency than a second term with President Bush? Or even that the market might soar next year should Kerry be elected? Not necessarily. Even though investors may all too clearly remember the 13% decline suffered by the S&P 500 during President Bush's ("43") first year in office, they may have forgotten that the Index also slumped 11.5% during Jimmy Carter's inaugural year.
In our opinion, investors should be more concerned by how the market weathers election surprises. The table below indicates to us that, in elections since 1945, investors breathed a sigh of relief in the year following an incumbent's reelection, but did not take kindly to unexpected administration changes and the resulting policy uncertainty.
So what about this time around? In addition to concerns over high energy prices and the prospective adverse impact that rising interest rates may have on corporate earnings, equity investors may be concerned about Kerry's stated intention to roll back Bush-initiated tax breaks--particularly those related to dividend income.
In all, we believe investors will be paying very close attention to campaign rhetoric in the weeks ahead in order to get a firmer grip on the likely policies of a first-term Kerry presidency or a second-term Bush administration. But the most important thing to remember is that over the long haul corporate profits are what drive the stock market, not presidential politics.
Sam Stovall is chief investment strategist for Standard & Poor's.
myfidelity.members.fidelity.com |
