The 5 Mistakes Every Investor Makes and How to Avoid Them by Peter Mallouk

Author:Peter Mallouk
Language: eng
Format: mobi, epub, pdf
Tags: self help, economics, finance
ISBN: 9781118929001
Publisher: Wiley
Published: 2014-07-14T00:00:00+00:00

Misunderstanding #7—Believing Republicans Are Better for the Market Than Democrats

The common viewpoint is that Republicans are good for…the economy. Meanwhile the common view of Democrat policies is that they…are economy killers. Well, for those who feel this way, it may be time to review…economic history.

—Adam Hartung, Forbes (2012)

Most investors equate a Democratic victory as synonymous with a stock market downturn. History tells quite a different story. When the presidency transfers from a Republican to a Democrat, the stock market averages a 22.2 percent return in the inaugural year. When the presidency transfers from a Democrat to a Republican, the market averages a 6.6 percent loss in the inaugural year. CMC Market's 2012 report, “U.S. Market Performance Since 1900: Republicans versus Democrats,” shows that across all terms, Democrats posted an average yearly return of 15.31 percent while Republicans fared far worse, averaging just 5.47 percent per year (Cieszynski 2012). A separate New York Times study compares the two from 1929 to 2008, with Democrats averaging 8.9 percent and Republicans just 0.4 percent per year. The margin has widened even more since then given the performance of the stock market since the start of President Obama's first term (McCall 2008).

There are two main theories for this traditionally unexpected result. The first theory is that investors expect radical changes from Democratic presidents, including significantly higher taxes on income and investments, corporate taxes, and an environment generally less friendly toward corporations. The same theory holds that investors expect tax cuts, spending cuts, and fiscal restraint from Republican presidents. The stock market adjusts in advance of the expected outcome of the election. When a Democrat replaces a Republican, the market often adjusts upward when it realizes that the new president may be friendlier than originally expected toward corporations and high income tax payers. Likewise, the market often adjusts downward when it realizes that the new Republican president may not cut spending as expected. Proponents of this theory cite two recent examples: (1) tax cuts, free trade, and record surpluses under President Clinton and (2) record spending and deficits under President George W. Bush. The point is simply that the market has certain expectations from each party, and many times those expectations are not fulfilled, for whatever reason.

The second theory is that this statistic is irrelevant, and has more to do with the “luck of the draw” than with whoever is President (much in the same way the stock market tends to go up if the AFC wins the Super Bowl and decline if the NFC wins).

We do know with certainty that the market is constantly “pricing in” hundreds of variables—from the deficit to interest rates; the business cycle to commodity prices; from consumer confidence to corporate profits; and yes, whoever controls the White House and Congress.

As a result, we cannot put too much emphasis on one factor alone having such a large impact on stock market performance. In total, an election itself will not drive the markets.

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