Stocks - Bush vs. Obama

I live in a very politically conservative community - Colorado Springs. Whenever I'm around local investment professionals, I hear how bad Barack Obama has been for the stock market, which got me to wondering if that were actually true. So I thought it would be interesting to look at US stock market performance under Obama and G.W. Bush. While I'm at it, let's also take a longer-term look at stock performance under Democrats and Republicans. Finally, I'll offer my thoughts on what the statistics mean, along with what conclusion you shouldn't make.

Obama vs G.W. Bush
Let me first get it on the table that, though I'm a long-time registered Republican, I don't particularly identify myself with any political party. So when local investment advisors tell me that the market plummeted today because Obama gave a speech, I'm already skeptical. Especially considering that no one can accurately explain what the stock market does in any one day. However, when they tell me how bad the stock market has performed under Obama, that's something that's easy enough to check out.

To measure US stock returns, I looked at the total return of the US stock market and used the total return of the Wilshire 5000. I don't want the partial returns of narrower indexes like the DOW 30 or S&P 500. I then looked at the annualized returns under G.W. Bush for the eight years ending January 20, 2009. I did the same for the period since January 20, 2009 for Obama.

The results:

G.W. Bush - negative 3.5 percent annually
Obama - positive 20.1 percent annually

Fact: The US stock market performed better under Obama than G.W. Bush by a staggering 23.6 percentage points a year.

Democrats vs. Republicans
The same local investment advisors who declare that Obama is bad for stocks, also state that the market wants Republican pro-business policies. While those investment advisors also claim to be able to pick winning stocks and time the market, I've long since accepted that not only do I not possess those abilities, such abilities do not even exist. Nor does the ability exist to actually know what the stock market wants. I can, however, research past performance under Republican and Democratic administrations.

The October 2003 Journal of Finance published such a study by Pedro Stana-Clara and Rossen Valkanov that examined the issue. The study viewed stock market returns from 1927 - 1998, and was far more scientific than my simple analysis of stocks since 2001. It looked at excess returns over the risk free rate of a three month Treasury bill.

The results:

Republicans - positive 1.7 percent annually
Democrats - positive 10.7 percent annually

Fact: Through 1998, US stocks performed higher by nine percentage points annually under Democrats than Republicans. If this study were to be updated, the gap would widen further.

So what does this mean?
I caution you not to conclude that future stock performance will be better under Democrats. These statistics could just as easily be the result of finding patterns out of randomness, such as the Superbowl effect or September bear market trend.

What it does mean is that investment advisors, and even investors as a whole, are very loose with quoting market data. Accuracy seems to be irrelevant. Throw a little politics into the mix and the emotion drives the distortion higher by a factor of ten. People want the data to support their positions so they make up some facts. Others hear these faulty facts and let confirmation bias drive them to blindly believe and spread the word without bothering to verify the accuracy. Simply put, people believe these statements as fact because they want to believe them.

Whether Obama gets another term, or a Republican takes up residence in the White House, I'm sticking to my asset allocation policy. I'm even sticking to my asset allocation through the current destructive, make the other party look bad, lack of governance our politicians seem to be showing today. I don't claim to know everything financial markets want, but I've got to believe markets would rather have a functional government over what we currently have today. Admittedly, I have no data to support this last opinion.

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Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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