Market Gains by President/Congressional Party

Tuesday, October 31, 2006 | 06:59 AM

Interesting study by Ned Davis, via Van Kampen Investments of what the market's look like under different party rule.

Rob Schumacher of Van Kampen notes:

"In every presidential election year, voters and investors alike focus on the race for the White House, and rightfully so. You see, as shown in the accompanying chart from Ned Davis Research, the historical data depicts market returns that vary greatly under Republican or Democratic leadership.

The same data also suggest that while presidential races may dominate the statistical landscape, a more interesting interaction between politics, the public and stock prices is likely to take shape. And it has very little to do with who wins or who loses."

I am assuming that while there may be correlation between parties and market performance, there is no specific proof of causation, i.e., these policies cause those returns. My 2nd assumption is that the Federal Reserve Chair is more important than Congres or the Presidency to Markets. And in terms of data sets, 106 years -- ~26 presidential terms -- is a bit light. This might be really interesting after 500 years, though.

Regardless of those reservations, this is quite fascinating:
>

Gains (%) for Stocks by Party of the President and Majority Party in Congress
03/04/1901–10/23/2006

 
Political Variable Stocks
(DJIA) 
  Democratic President
7.19%
Republican President 3.85%
Democratic Congress 6.46%
Republican Congress 3.51%
  Dem Pres, Dem Cong
6.53%
   Dem Pres, Rep Cong 9.60%
   Rep Pres, Rep Cong 1.54%
   Rep Pres, Dem Cong 6.37%
All Periods Buy & Hold 5.34%

Sources: van Kampen, Ned Davis Research

>

The most interesting aspect of the current research into party control has little to do with which party has Congress or the White House -- its when Congress is in session or not:

"Using historical pricing on the Dow Jones Industrial Average (DJIA), the Standard and Poor’s 500 Stock Index (S&P 500), the Center for Research in Security Prices (CRSP) Equal-Weighted Returns Index and Value-Weighted Returns Index, Ferguson and Witte* find that, “Depending on the index, daily returns when Congress is in session range from 1 to 4 basis points per day. When Congress is out of session returns range from 5 to 15 basis points a day.”

Media spin aside, in a striking conclusion Ferguson and Witte remind their readers that, “Fully 90 percent of the historical capital gains on the DJIA occurred on days when Congress was out of session"

We are tempted to make the tongue-in-cheek observation that when Congress -- of either party -- is in session, it is dangerous to your portfolio's health!

>

UPDATE October 31, 2006 10:11 am

And as we have discussed in the past, it is important to consider Multiple Variables in Market Analysis. Who controls the Congress or Presidency is but one issue out of 100's if not 1,000's, and perhaps a minor one at that . . .


>



Sources:
For Investors, Elections are Only the Beginning
Rob Schumacher          
Van Kampen Insight Line—October 30, 2006
http://www.vankampen.com/vksite/news/commentary/insightline103006.asp

Gains for Stocks, Industrial Production, Inflation, Bonds and U.S. Dollars ($),
by Party of President and Majority Party in Congress"
Ned Davis Research
Report T_50, 03/04/1901 to 10/23/2006”

Congress and the Stock Market
Michael Ferguson and Hugh Douglas Witte
University of Cincinnati and University of Missouri, March 13, 2006
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=687211

Tuesday, October 31, 2006 | 06:59 AM | Permalink | Comments (30) | TrackBack (1)
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» Mid-Term Elections from A Dash of Insight
There is a lot of market attention to the mid-term elections. As a former professor in this field for more than a decade, and later a market analyst and investment manager, this is in my sweet spot. The analysis of [Read More]

Tracked on Nov 2, 2006 9:34:03 PM

Comments

Was anyone else but me surprised that the Dow only returned 5.34% per year over a century?

I assume that is without dividends, which were more significant -- ~4% -- back in the day.

Posted by: Barry Ritholtz | Oct 31, 2006 7:28:18 AM

The comments to this entry are closed.



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