What do presidents mean for the market?

By DAVID MOON, Moon Capital Management
February 22, 2004

It appears that the democrats will select John Kerry as their warrior to battle Bush this fall. Predicting election winners is the province of serious thinkers and writers like Frank Cagle, Sam Venable and Charlie Daniel. Here, we only deal with the minutia and mundane: the money.

Common opinion often holds that republicans are friends of big business and, as such, are more friendly to folks who care about selfish pursuits like the accumulation of wealth.

But this may surprise you: since 1926, the stock market averaged a 14.8 percent average annual return while democrats occupied the White House. During republican administrations, the return was only 9.7 percent.

Adjusted for inflation, the relationship is similar: eleven percent for democrats versus 7.4 percent for republicans.

There are some other interesting tidbits. Seven times since 1926 a president served only a single term. In six of those instances, the stock market increased in the final year of a single term president. (Calvin Coolidge in 1932 was the lone exception.)

Every time a republican followed a democrat in the White House (four times), the stock market declined during the first year of the republican's administration. But in three of the four times democrat presidents succeeded republicans, the stock market increased in the first year.

My republican friends will accuse me of being a traitor to the cause by noting these facts. My handful of democrat friends will renew their efforts to convince me to vote for a real man of the people, like John Kerry. (Their efforts will fail.)

My point is not to influence your thinking about the election, but rather your thinking about the stock market. Just because there is an anecdotal correlation between two things doesn't mean there is any causal relationship. I could have just as easily presented statistics "proving" that the stock market performs better during wartime than peacetime. I have noticed that stock prices tend to rise during years in which I lose weight. (Perhaps I eat less when democrats are in office because high taxes limit my ability to purchase as much food. Just kidding.) Based on years of extensive work, our researchers at Moon Capital Management have discovered that the stock market increases following Super Bowl halftime shows in which any female performer accidentally exposes her right nipple. (This correlation only holds true if the performer is the sister of an accused child molester.)

Since stock prices tend to increase over time, changes in stock prices will positively correlate with any similar patterns. But the reason stock prices tend to increase is due to increasing earnings and general growth in the economy. Yes, there are times that the U.S. economy doesn't grow. And there are times earnings at specific companies do not increase. And there are times that stock prices move in opposite direction from the short-term movements in the economy and corporate earnings. But in the long term, these and other real economic factors are what determine stock prices - not presidents.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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