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As Goes the White House, So Goes the Market?

Steven Goldberg

You shouldn't bet on either party helping or hurting the market. There are Obama and McCain stocks, though.



This is the time of year when investors and the financial media begin talking about which stocks will do best depending on who wins the election -- and which candidate will help, or hurt, the stock market.

The prevailing wisdom is that an Obama presidency will mean higher tax rates -- and, indeed, Barack Obama has promised higher tax rates for high-income Americans and on capital gains. The conclusion: An Obama win will be bad for the stock market.

Maybe so. But the record of stock-market returns under Democratic and Republican presidents paints a much more mixed picture.

Let's look at some numbers. Since 1896, U.S. stocks have gained an annualized 5.6% under Republican presidents, compared with 4.9% under Democrats (the figures don't include dividends). Seems like the GOP really is better for the market.

But if you start a bit later, the results are quite different. From 1929 through August of this year, Standard & Poor's 500-stock index returned an annualized 13.4% (including dividends) when Democrats occupied the White House and just 5.6% when Republicans did. So maybe Democrats are really the ones who make the stock market tick.

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Trouble is, the numbers are skewed in favor of the Democrats because Franklin D. Roosevelt took office in 1933, after the stock market had crashed. The Republicans are badly hurt, meanwhile, because of the market's horrific performance under Herbert Hoover (from the its peak in 1929 to its trough in 1932, the market plunged 89%).

Consider the post-World War II era, and Republican presidents again look sweeter for stocks. Under GOP administrations, stocks have returned an annualized 7.5%, compared with 6.7% under Democrats.

What to make of the conflicting returns? It's simply impossible to draw any meaningful conclusion about which presidential candidate will help or hurt the stock market.

John McCain says he wants to cut taxes, while Obama says he wants to raise taxes on the wealthy while cutting them for the middle class. Bill Clinton raised taxes, and that may have actually helped the stock market because the federal budget deficit disappeared toward the end of his presidency check timing.

According to the nonpartisan Joint Tax Policy Center, both candidates' tax proposals would swell the deficit. By 2018, Obama would cut taxes by $2.9 trillion, and McCain would reduce them by $4.2 trillion. Neither candidate has spelled out how he would pay for those tax cuts.

The proposals may be little more than empty campaign promises-especially given the costs of the financial rescue package that passed Congress on October 3. Remember, Clinton took office in 1993 after promising a middle-class tax cut-and promptly changed his mind. Hard fiscal realities, rather than party ideology, may drive the next president's tax plans.

But aren't there "Obama stocks" and "McCain stocks"? For example, the conventional wisdom is that an Obama victory would hurt health-care stocks and boost the fortunes of alternative-energy companies.

I would actually bet the other way. If it looks like Obama will win, investors will punish health-care stocks before Election Day. I think health-care companies will do just fine under an Obama administration -- as they have under previous Democratic presidents. Under Clinton, for example, investors sold off drug stocks when it looked like sweeping health-care reform might be adopted. But the reforms never came to fruition, and 1993 turned out to be a terrific time to buy health stocks.

Similarly, if it looks as if McCain will win, alternative-energy stocks are likely to see a sharp selloff. I think that would set up a buying opportunity after the election. McCain has been almost as outspoken as Obama about tackling the energy crisis and about taking action to slow and ultimately reverse global warming.

Steven T. Goldberg (bio) is an investment adviser and freelance writer.




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