Investing In Party Politics

By Derek Simon | November 06, 2008 AAA

Shortly after Barack Obama was elected forty-forth President of the United States of America on Tuesday, I went to my "thinking room" - the one place in the house devoid of screaming kids, television and other distractions - and reflected on what an Obama presidency would mean for the stock market. Although I failed to come up with a satisfactory answer before I flushed, I did resolve to undertake some research and find out.

Donkey or Elephant?
Conventional wisdom suggests that markets perform better under the stewardship of Republicans, who are traditionally perceived to be more business-friendly. Investopedia's Lisa Smith argues that such may not be the case. Pointing to a study by Pedro Santa-Clara and Rossen Valkanov entitled "The Presidential Puzzle: Political Cycles and the Stock Market" that was featured in The Journal of Finance in October of 2003, Smith notes that "when a Republican president held office, the value-weighted return delivered nearly a 2% premium over the T-bill. When a Democrat held office, the premium was nearly 11%." (To read the entire article, see For Higher Stock Returns, Vote Republican or Democrat?)

"While the 9% difference clearly favors the Democrats, the results from the equal-weighted portfolio were even more telling, with a 16%+ result in favor of the Democrats," concluded Smith.

Adam Shell of USA Today offers further proof. "Let's bust one myth: namely, that Republican presidents are better for stocks," he wrote on November 4, 2008. "It is not true. In election cycles since World War II, the Dow Jones Industrials have posted bigger average returns under Democratic presidents, [according to the] Stock Trader's Almanac."

Dow Jones Industrial Average Gains Since 1953
Republican President: 8.0%
Democratic President: 9.1%
Source: Stock Trader's Almanac

Inside the Numbers
My own analysis was more specific, but a lot less conclusive. To begin with, I only looked at the markets' performance from the day after the election through the end of the year. To me, this time frame is more reflective of investor sentiment than a longer period of study, which naturally allows more variables to be introduced.

I found that from 1928 to 2004, the Dow gained 3.76% when the president-elect was a Republican, compared to 0.31%, when the president-to-be was a Democrat. Margin of victory didn't help the cause of the Dems much, however. Future presidents who received at least two-thirds of the electoral votes - as Obama did - resulted in a Dow gain of just 0.37% for Democrats versus a 4.63% increase for Republicans.

Stocks to Watch
Still, many Wall Street watchers are optimistic about an Obama presidency. Ed Black, President and CEO of the Computer and Communications Industry Association, thinks Tuesday's election spells good news for technology companies. "There has not been much leadership on technology issues in Washington over the past eight years," Black told the Associated Press. "We don't want special favors; we just want people to understand us."

The way things stand, Black might want to reconsider his stance on special favors. Since the November 4 close to the close on November 6, IBM (NYSE:IBM) has dipped 8.5%, Google (Nasdaq:GOOG) has plunged 9.7% and Microsoft (Nasdaq:MSFT) has plummeted 11.3%.

Not surprisingly, oil stocks also have been yielding to economic gravity lately. Chevron (NYSE:CVX) is down 10.3% since Election Day, BP (NYSE:BP) has dropped 8.3% and Exxon Mobil (NYSE:XOM) has declined 9.7%. Unlike the technology sector, however, Big Oil has fallen and may not get up again - at least not for awhile. Not only has the price of crude dropped to levels so low that a modern day Jed Clampett probably couldn't afford to leave the mountains, Obama has made it clear that oil company executives aren't exactly in his Fav Five, either. (Learn how to invest during an economic downturn in Surviving Bear Country.)

"I don't take money from oil companies or Washington lobbyists, and I won't let them block change anymore," the future president said in a March primary campaign ad. "They'll pay a penalty on windfall profits. We'll invest in alternative energy, create jobs and free ourselves from foreign oil." Any smart investor must take these statements and factors into consideration when deciding where to put their money. (Learn how your portfolio should evolve to suit bear market conditions in Adapt to a Bear Market.)

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