Donkeys, Elephants, Bears, And Bulls

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When the elephant wins the White House, does the bull reign on Wall Street? With the Democratic convention right around the corner, we at Standard & Poor's thought we would examine a widely held view on Wall Street -- and on Main Street -- that equity investors prefer a Republican President.
Oddly enough, however, the opposite appears to be true. According to a study we recently conducted, the Standard & Poor's 500-stock index has posted better returns when a Democrat has held office than a Republican. Since 1929, the S&P 500 has gained an average 10.1% during each year of a Democratic Administration, yet only 3.8% during Republicans' years in office.
Even excluding the Great Depression, Democrats continue to hold the edge. Since 1945 the S&P 500 has risen 10.7% each year under Democrats and 7.6% under Republicans.
EARLY CHALLENGES. One reason could be that economic recessions occur more frequently during Republican Administrations than Democrats'. Since June, 1899, the U.S. has had 22 recessions -- 15 (two out of three) beginning while a Republican was President. The recession of March, 2001, through November, 2001, arrived only two months after President George W. Bush was sworn in.
Many market historians enjoy analyzing the Presidential cycle and drawing prospective investment conclusions. As can be seen in the table below, when the four-year 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 their Administrations. I will leave it up to the reader to decide if that's the result of the economic conditions the respective chief executives inherited -- or their own mismanagement.



S&P 500 performancesAverage % ChangesYear-1Year-2Year-3Year-4All YearsDemocrats in office since 19299.0%4.3%17.7%9.4%10.1%Democrats in office since 194514.2%1.6%17.3%9.7%10.7%Republicans in office since 1929-3.4%2.7%11.3%4.7%3.8%Republicans in office since 1945-2.4%6.6%18.7%7.5%7.6%Average since 19293.1%3.5%14.7%7.3%7.2%Average since 19455.4%4.3%18.0%8.6%9.1%


Should an investor infer from this table that -- statistically speaking -- they would be better off under a Kerry Presidency than a second term with President Bush? Or even that the market may soar next year should Kerry get elected? Not necessarily. Even though investors may all-too-clearly remember the 13% decline suffered by the S&P 500 during President Bush's first year in office, they may have forgotten that the index 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 after an incumbent's reelection, but they didn't take kindly to unexpected Administration changes and the resulting policy uncertainty.



Election Result Year After ElectionsAvg. % ChangeIncumbent Victory1949, 57, 65, 73, 85, 977.5%Incumbent Loss1977, 81, 93-4.7%


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 also may be concerned by Kerry's stated intention to roll back the tax breaks initiated by the Bush Administration -- particularly those related to dividend income.
POLICY POINTS. In addition, the presumptive Democratic nominee's advocacy of health-care price controls in general, and drug reimportation in particular, may be delaying a price recovery for many major pharmaceutical outfits, despite their defensive characteristics.
In all, we believe investors will be paying very close attention to campaign rhetoric in the months ahead, in order to get a firmer grip on the likely policies of a first-term Kerry Presidency or a second-term Bush Administration. So while it's interesting, and illuminating, to study the market's performance in light of past election results, investors would be well served to keep an eye on what may lie ahead.