Democrat or Republican - Who’s Better for the Stock Market?

January 10, 2008

It’s not a big secret that most people think that Republicans are better for the Wall Street folks. With policies that seem to favor the rich and the invested class, with less taxes and a less progressive tax structure, how can they not be? People think that Democrats, with their concern more for regulation and taxation, are against the best interests of the rich in the United States. However, the stock market has actually done markedly better under Democratic administrations than under Republicans!

Since 1888, the annualized nominal return on stocks (using the Dow Jones Industrial as a proxy for the market as a whole) has been 9.72%. That means, on average, not taking inflation into account, stocks have returned 9.72% each year. However, under Republican administrations, the return has been only 8.79% a year on average. Under Democrats, the return has been 10.84% - a difference of more than two percentage points. To make the point even more clear, the stock market has increased at a rate more than 23% faster under Democrats than Republicans. (source: Siegel, Jeremy. Stocks for the Long Run, 2002 edition).

It would be possible to argue that this is due solely to the disastrous bear market starting in 1929, kicking off the Great Depression. You could also argue that since this goes back so far, you need to consider the impact of other one-off events which occurred more frequently in the past, such as the Panic of 1907, which again just happened to occur under a Republican administration. However, if you take the post-World War II time period, 1948 to 2006, there is even MORE of a marked increase in the difference between stock returns under different administrations. Under Democrats, the market has returned 15.26% annually; under Republicans, 9.53%. Therefore, the rate of growth in the stock market was more than 60% greater under Democrats than Republicans since WWII.

Some people may argue that Congress has more impact on economic policy, so let’s check that out as well. According to this Slate article, a Democratic Senate has tended to correlate with returns of 10.5%, versus Republicans with 9.4%. When it comes to the House of Representatives, a Democrat-controlled House means a return of 10.9% on average, versus 8.1% for the Republicans. It’s not quite as blatant as the Presidential returns, but still pretty significant.

No matter what your political leanings, from an economic perspective, if you’re heavily invested in stocks, you should be hoping for a Democrat landslide in November of 2008.

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