Don't Mess With Taxes

It might sound like a companion game to Dungeons and Dragons (and yes, I realize that reference indicates my age and possibly some nerdiness!), but political and market observers say there's a definite connection between stock performance and the political party occupying the White House.

Today, stocks rose in the biggest Election Day rally ever. Reuters reports that the rally pushed stocks to their highest close since Oct. 6, with the S&P 500 crossing the 1,000 mark for the first time since Oct. 13.

Overall, the three major U.S. stock indexes all ended up around 18 percent from their Oct. 27 closing low points.

Are the markets predicting a Democratic victory? Maybe.

Political market predictors? According to a chart published a couple of weeks ago in the New York Times, a $10,000 investment in the S&P index made in 1929 would have grown to $11,733 if invested under Republican presidents only.

If you exclude Herbert Hoover’s presidency during the Great Depression, the amount would have come to $51,211.

But if the $10,000 had been invested under Democratic presidents only, it would have grown to $300,671 at a compound rate of 8.9 percent over nearly 40 years.

And now we pause for some words of wisdom (and perspective) from Mark Twain: "Figures don't lie, but liars figure."

I don't mean to be harsh. I'm just saying that numbers can be crunched many interesting ways.

Alternate numbers crunching: Financial adviser Ric Edelman agrees. Citing an analysis using Mathematica software, Edelman says that the New York Times' calculations give each president credit from the first day of his administration to his last.

It ignores the fact that the market is a leading economic indicator, meaning the performance near the end of each administration could more properly belong to the successor rather than the incumbent.

Adjusting for that, Edelman says, the results are Republican earnings of $56,018 and Democratic earnings of $97,724.

That's not quite twice as much, whereas the NYT methodology had the gains under the Dems coming to more than 25 times that collected under GOP administrations. 

Edelman also looks at the results when you consider reinvested dividends (the Democratic presidents win quite handily), when inflation is considered (Republicans come out on top this time) and starting with a different year (he picked 1933 instead of 1929, which gave the GOP a substantial edge).

Elsewhere in the paper: The NYT's Deal Book feature also notes that Elections Are Fertile Ground for Testing Market Soothsayers.

In 1967, market forecaster Yale Hirsch unveiled his theory of the relationship between presidential elections and the stock market. Tracking data back to 1833, Hirsch found that on average, stocks performed better in the final two years of a presidential term.

He attributed this trend to maneuvering by the party in power to better its chances of re-election.

Apparently, Dubya didn't get the memo.

That's why, notes Deal Book, many analysts have pointed out that declines in the stock market right before a presidential election generally point to an advantage for the challenging party.

No connection at all? Or perhaps, adds the column, there is no connection at all between political parties and market performance.

But we humans, being a superstitious lot, are always looking for an edge. So the correlations or aberrations between various factors keep getting pointed out.

What we all should be doing instead, regardless of who wins today, is investing for the  long haul and hoping that our elected officials in both political parties won't do too much damage when all is said and done!