Global Investing

Is a Democrat sweep better for stocks?

By Reuters Staff
October 30, 2008

Investors may be worried about a possible combination of a Barack Obama administration and a Democrat-controlled Congress, but history shows that of the two likely election outcomes, that scenario is better for stocks.

The Democrats look set to maintain control of Congress in the November 4 election and may well expand their grip on the legislative branch. Conventional wisdom is that so-called “gridlock”  — a situation in which neither party can make sweeping policy changes that can upset markets — is best for markets.

Courtesy of Bespoke Investment Group, here are the seven periods when Democrats had complete control and corresponding stock performance:

JFK/LBJ LBJ Carter Clinton
Start Year 1961 1963 1965 1967 1977 1979 1993
President D D D D D D D
Senate D D D D D D D
House D D D D D D D

Index 1961 1963 1965 1967 1977 1979 1993 Average
S&P 500 8.6 34.3 -5.2 29.3 -10.6 41.3 5.4 14.7
Cons Discret. 22.2 70.7 -6.1 111 -10.6 19.7 1.7 29.8
Cons Staples 5.3 21.7 -4.2 42.9 -1.6 -1.8 0.1 8.9
Energy 32.7 44.8 -11.3 33.4 -4.2 117.4 10.7 31.9
Financials 30.2 16 -11.3 38.7 -19.6 16.9 0.9 10.3
Health Care -1.4 33.4 27.5 29.3 -3.4 33 -1.9 16.7
Industrials 7.3 35.8 -4.9 32.6 -10.3 44.1 10.3 16.4
Materials 12.8 34.1 -29.4 15.4 -30.2 19.9 14.2 5.3
Technology -2.2 30.8 40.3 72 6.9 -1.1 43.5 27.2
Telecom Svcs 9.2 19.3 -16.4 -1.6 -5.1 -19.8 1.5 -1.8
Transports 7.8 45.6 -1.2 33.8 -12.9 92.7 0.4 23.8
Utilities 29.2 20.1 -12.2 0.7 -9.4 16.5 -10.7 4.9

And here are the eight periods when a Republican was President and Democrats controlled the Senate and House:

Nixon Nixon/Ford Reagan Bush I Bush II
Start Year 1969 1971 1973 1975 1987 1989 1991 2007
President R R R R R R R R
Senate D D D D D D D D
House D D D D D D D D

1969 1971 1973 1975 1987 1989 1991 2007 Average
S&P 500 -11.3 28.1 -41.9 56.7 14.7 18.9 31.9 -37.8 7.4
Cons Discret. -8.4 27.6 -65 115.2 9.7 10.2 62.4 -48.9 12.9
Cons Staples 13.8 37.7 -43.8 48.3 39.4 68.4 42.6 -11.6 24.3
Energy -18.6 16.8 -24.6 55.1 21 28.8 0 -23.7 6.9
Financials -5.7 34.8 -29.1 18.1 -13.2 -7.3 72.2 -61.9 1
Health Care 16 52.7 -26.4 -4.3 22.4 67.5 23 -23.3 16
Industrials -10.7 30.7 -42 56.2 19 10.7 34.5 -37.6 7.6
Materials -19.1 38.1 -25.9 52.5 17.1 3.9 30.3 -35.8 7.6
Technology -4.4 33.3 -50.1 55 2.4 -13 7.2 -33.9 -0.4
Telecom Svcs -9.8 7 -20.8 46.4 13.1 26 19.8 -38.5 5.4
Transports -36.8 32.4 -36.9 65.2 20.2 -6.1 59.2 -23.2 9.3
Utilities -11.2 -1.9 -42.5 57.6 -9.6 16.5 16.4 -25.7 0

More data and research are available at Bespoke Investment Group.

Click here for more from Reuters reporter Kristina Cooke.

What do you think the best combination would be for the stock market? Leave your answer in the comments section.

Comments
3 comments so far | RSS Comments RSS

Statistics based on history can hardly be a reliable predictor when Obama is the least experienced and most liberal candidate nominated to that office in modern history. He is also the first with an actual chance at election who is clearly by his stated agenda a socialist.

“Socialists mainly share the belief that capitalism unfairly concentrates power and wealth among a small segment of society that controls capital and creates an unequal society. All socialists advocate the creation of an egalitarian society, in which wealth and power are distributed more evenly, although there is considerable disagreement among socialists over how, and to what extent this could be achieved.[1] [http://en.wikipedia.org/wiki/Socialism] ”

Redistribution of wealth is a fundamental socialist principle. While Obama’s stated belief is seriously dangerous, the key risk is that we don’t know which branch(es) of the broad theory he actually believes. Given what we do know of his previous associations, it is unlikely the Professor’s beliefs are developed only to the extent of justifying taking money from the advantaged though taxes and giving it as gifts to whomever he considers disadvantaged.

Putting a lawyer who has never managed anything, and is clearly a Socialist, in charge of the world’s largest Capitalistic society in a time of crisis appears to be unprecedented in modern history. Further, he has stated that he intends to increase taxes, including corporate taxes, capital gains, and dividends, then “redistribute the wealth”. While such policy would be problematic in even a moderately stressed economy, it is understood that this approach was disastrous in the early 30s following 1929 crash.

Using statistics of past history to predict future performance assumes the modeled process changes only within modeled bounds. In the present case, that does not appear to be a reasonable assumption.

Posted by William Mills | Report as abusive
 

I was curious what the data would look like with a president/house/senate all republican? and a democrat president with a republican house/senate. It would have been nice to see as a comparison.

Posted by Dave | Report as abusive
 

If we just look at the average data, then having democrats leading all three branches gives the best result for economy. However, your data does not show the general trends in international economy. For example, in 1973, 1977, and 2007 we were dealing with a down turn and any combination would have resulted in similar data.
Therefore, there is no real correlation between economy and who has the control of three branches. Let me clear this with an example. We went from a good economy in 1967 to a down turn which conincide with Democrats changing presidency but controlling house and senate. However, the problem was not this change in presidency, but an economic down turn which resulted in stagflation on early 1970s with sudden increases in the oil price and creation OPEC. On the other hand when comparing 1991 and 1993, we see a change in presidency going to Democrats who consolidated their dominance in the house and senate that correlates with a down turn in economy. However, we should not forget that after the booming economy with a summit about 1990, we saw a down turn which ended in the presidency of Clinton in 1992. The low performance in 1993 was not due to Democrats having control on presidency, house, and senate. It was a condition of economy. In other words, the economy in general precedes the political change and not the other way around except in rare conditions. On the other hand we need to be aware that a market economy had the inherent contradictions of a period of boom followed by a down turn and whichever politician/party who happens to coincide with any of these periods will take the blame or the credit.
Let me site two other periods. First, from 1965 to 1967 where Democrats had the control of presidency, house and senate, yet market changed from a trpuble economy to a prosperous one. With the same token, from 1973 to 1975 there was a change from trouble economy to a promising one, yet there was no change in the power sharing and in both cases, republicans had the control of presidency and democrats were in the control of house and senate.

Therefore, there is no real correlation between who is controlling which branch of power. What we are seeing in the data confirms my reasoning. We can see only a poetion of data and rely on that. Yet, the data speak for themselves and nothing can be done to change the mind of a person who has already made his/her mind and is driven by personal biases.

Posted by Kauroon Darya | Report as abusive
 

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