To say uncertainty is dragging down the markets is an
understatement.
The financial crisis continues to unravel in the United States.
Every financial commentator is talking up the U.S. government's list
of more than 100 "problem banks."
Fears of another Asian financial crisis are gaining steam. The
Thai baht, the Russian ruble, and the Chinese yuan are all well off
their highs and in a downtrend. Even commodities are getting rocked.
Precious metal, oil, natural gas, and base metals are all in
freefall.
Yet there are some surprises...
The U.S. dollar has had a solid month-long upswing and has
resumed its place as the safety currency of choice. Who would have
predicted that two months ago?
Over this landscape of uncertainty is a hotly contested election.
We're entering the final leg of the U.S. Presidential election and
it looks like it's going to come down to the wire. The latest Gallup
poll has McCain/Palin edging out Obama/Biden by a relatively slim
4%(with a 3% margin of error).
Over the next two months, we're going to hear a lot about which
candidate is better for the stock market and how to get positioned
for whoever wins. We'll be told to sell medical industry stocks in
anticipation of Obama's national healthcare system. Or we'll get
told to buy oil stocks if the McCain/Palin ticket swings into the
lead.
Regardless of who eventually wins, we'll have the same old
problems hanging over the markets...financial crisis, recession,
inflation, etc. Either candidate will have to deal with it. But a
lot of investors might be pulling for Obama.
Why? The answer is because the stock market does better when a
Democrat is sitting in the Oval Office. CNN says, "The stock market
performs better and tends to be less volatile when Democrats are in
power."
In this case, CNN is right. But should we be pulling for an Obama
win just to help get the markets turned around? If we look at the
historical returns of presidents from different parties, the answer
may surprise you.
When it comes to the stock market, there is no better historian
than Dr. Jeremy Siegel. The University of Pennsylvania professor has
compiled data on the U.S. market back into the 1800's. In his book,
Stocks for the Long Run (a must read for any investor) Siegel
reveals the impact of a President's party affiliation.
Dr. Siegel has discovered the following:
Stock Market Performance and the U.S. Presidents
Time Frame Political Party Average Annual Return
1888 to now
Democrat
10.85%
1888 to now
Republican
8.25%
1948 to now
Democrat
15.26%
1948 to now
Republican
9.01%
The data suggests that our brokerage accounts would be healthier
with President Obama. But these historical numbers don't tell the
whole story.
For instance, Republican President Herbert Hoover officially took
office January of 1929. That's nine months before the worst crash in
U.S. stock market history. During his four year term the stock
market fell about 80%. Hoover stayed in office until January of
1933, the same year the stock market finally hit rock bottom. The
market averaged a 20% loss per year during Hoover's presidency.
Democrat Franklin Roosevelt moved into The White House close to
the stock market bottom.
Under Hoover, every 100 dollars invested in the stock market was
worth $20 at the end of it. Under Roosevelt, the stock market slowly
climbed back to its previous 1929 highs and. The market took 13
years to return to pre-crash highs, but since Roosevelt came in at
just the right time, the market returned about 400% over his four
terms. That would make every $20 invested at the start of
Roosevelt's presidency worth about $100 at the end.
In reality, the $100 an investor had in the market when Hoover
took over would have just been about $100 at the end of Roosevelt's
presidency.
Roosevelt came in at exactly the right time. The difference in
returns (an 80% loss in four years compared to a 400% gains in 13
years) has a big impact when we look at returns over the past 20
years. Considering there's only a 2.6% average difference in annual
returns, that one 17-year huge price swing accounts for a big part
of the difference.
Also, we've got to consider President Bill Clinton rode the
tech-bubble to astounding annual returns. And, of course by luck of
the draw, he got out just two months before the March 2001 peak.
Republican Richard Nixon was in office during the early 70's bear
market as well and resigned at the worst possible time from a stock
market valuation perspective.
In short, Republicans get the boot at the bottom and Democrats
come in and ride the inevitable return.
But are the democrats causing the stock market to rebound? If so,
how? Is it their policies? Their ability to instill confidence in
the U.S. economy? Or have they been just lucky? Not even the biggest
Bush-hater would suggest that his policies triggered the dot.com
crash.
Frankly, it's a tough one to call. History moves in big waves,
sweeping everything with it, including Presidents. But one thing we
can tell from additional data: when the same political party
controls both the presidency and congress, it's not good news for
the stock market.
When the same party rules over all of Washington, the average
annual return for the stock market is only 11.83%.
It's a much different story when one party controls congress and
the other the presidency. The average annual return of the stock
market when during these periods is a respectable 16.34%.
My conclusion is that the choice of President doesn't really
matter that much to the stock market. Technically, the Democrats do
have a slight edge, but the flukey timing of the great depression
and the dot.com crash accounts for most of this "edge".
Don't let the presidential elections worry you or impact the
decisions you make. There's too much other stuff that actually has a
significant impact on the market. Right now, unemployment is surging
to its highest point in four years, every expert calling for another
"shoe to drop" in the financial sector, and investors' uncertainty
is rising each day...that stuff actually matters.
Stocks are very cheap and it seems everyone is selling. Everyone
is getting nervous. This is the time I buy stocks. I'm not the only
one though. David Dreman is making the best of the current
uncertainty. Dreman manages about $15 billion and made his mark as a
leading contrarian investor by recommending going long stocks in the
early 80's right as the markets were starting a multi-decade bull
run.
Dreman recently stated, "Between inflation and the liquidity
crisis, this is one of the toughest markets I've seen. But it's not
a market you sell into. Any losses you take by being too early will
be more than offset by buying cheaply."
The best investors in the world aren't letting emotions rule
their decisions and you shouldn't either. Buy great companies
selling at discount prices, everything else will work out. It always
has regardless of which party controls Washington.
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