Presidential Politics and the Stock Market

An analysis of Democrats vs. Republicans in regards to the stock market by Ben Brodeski, a fee-only adviser who manages more than $1 billion as managing director of Savant Capital Management.

The 2008 U.S. presidential candidates, Barack Obama and John McCain, will be debating many issues in the coming months, from the environment to the economy. With intense media coverage of the candidates’ promises for “hope” and “change”, investors are understandably wondering what this means for the stock market and their investments.

A common misconception is that the stock market performs better under a Republican president. The Republicans’ more pro-business and deregulatory policies are often thought to help stock returns, compared to the Democrats’ willingness to regulate and tax more. Historically, there is no evidence to support this theory. In fact, stocks have actually performed better when a Democrat lived in the White House. Since 1948, the S&P 500 Index gained 15.8 percent with a Democratic president as compared to 11.2 percent under Republican leadership. (The counterargument here is that the Democrats only appear to be ahead – actually they are benefiting on a delayed basis from the preceding Republican president’s pro-business policies.)

A major challenge with predicting how the market might react to one candidate compared to another is that it simply gives too much credit to a President’s ability to make a real difference in terms of the economy. For instance, Bill Clinton took office in 1992, just as a recession ended and a bull market began. On the other hand, George W. Bush’s first term that began in 2000 just happened to coincide with the bursting of the tech bubble. Presidents certainly react to current economic conditions, but that doesn’t mean that they can actually control them.

Of course, politicians can affect your pocketbook through their tax policies, so it does make sense to learn the differences between the two current candidates regarding your taxes and investments. (Click on the chart below to read a summary of some of the policies that the candidates have proposed during their campaigns.) In general, McCain is more in favor of keeping taxes where they are, while Obama is in favor of raising taxes for those in the higher tax brackets.

With tax policy approaches that are this different, it looks like more affluent Americans may very well end up experiencing a “presidential election effect” this year after all.