Who’s Better For The Economy, Obama or McCain?

Leading up to this U.S. election, there’s been lots of talk about how to fix the economy, and which Presidential candidate would be best for the country. Sometimes, someone will come up with reasonable, unbiased analysis like Andy on the Saving to Invest blog. But more often than not, the debate will degenerate into partisan bickering.

For example, a common tactic is to compare stock market returns under Republican Presidents and Democratic presidents – as was discussed on the Carpe Diem blog. The claim there was that if you had invested money since 1929 under one party or the other, the outcome would have been:

• Democratic Presidents: $10,000 became $360,000
• Republican Presidents: $10,000 became $11,000 (or $51,000 skipping the Hoover years)

Hmm… This merits a little investigation. The first thing to wonder is why they would start the comparison in 1929, just before the great crash? It would have been nice to at least go right back to the turn of the century. Too bad. I’m starting in 1929 because Yahoo only provides data back that far.

The next thing to do is to make sure we’re comparing apples to apples. Were Republican’s Presidents in power as much as Democratic Presidents? Yes, 40 years each. Good.

How consistent were the returns? I’m not sure which markets they were analyzing, but I’ll use the Dow Jones Industrial Average.

President	Party	Years	Average % Return Per Year
Hoover	Republican	4	-35.6%
Roosevelt	Democrat	12.2	9.3%
Truman	Democrat	7.8	8.0%
Eisenhower	Republican	8	10.4%
Kennedy	Democrat	2.8	4.1%
Johnson	Democrat	5.2	5.3%
Nixon	Republican	5.5	-3.2%
Ford	Republican	2.5	8.9%
Carter	Democrat	4	-0.2%
Reagan	Republican	8	11.3%
Bush (H.W.)	Republican	4	9.7%
Clinton	Democrat	8	15.9%
Bush (W.)	Republican	8	-1.6%

When looking at these numbers, 2 outliers stand out – Hoover and Clinton. What if we compare the average % return per year without these outliers?

Party	1929 – now	1933 – now	1933 – 1993
Republican	0.4%	5.5%	7.6%
Democrat	8.4%	8.4%	6.6%

Hmm… Was Hoover (or the Republican presidents before him), directly responsible for the 1929 crash? I don’t know enough history to know. But I wouldn’t be surprised if it was just lack of economic knowledge at the time, where anyone would have made the same mistakes.

Was Clinton directly responsible for the historic bull market during his term? Not really. The bull market started back in 1980, and continued through the end of the century. Was Bush responsible for tech crash in 2001? No. If anything, we can blame Clinton for creating the tech bubble, which led to the outsized returns during his term… Can we blame Bush for the current credit crisis? Sure…

But overall, looking at the chart, there are obvious bull periods, and obvious bear periods.

Presidential Terms	Annual % Return Per Year	Years Republican	Years Democrat
1933-1937, 1945-1961, 1981-2001	13.7%	20	20
The rest	-4.1%	20	20

You can slice and dice the numbers however you want, and come up with just about whatever result you want…

Bottom line, the economy has larger business cycles, that I think have little to do with the Presidents of the day. Besides, how much policy does the President implement? He can’t pass laws, he can only veto them….

So back to the original question, who’s the best person to help the stock market? Neither, I fear.

Everyone’s trying to figure out how to avoid a recession. The problem is, recessions are a natural and necessary part of the business cycle. “Creative destruction” cleans out the deadwood and inefficiencies in the economy, and leads to prosperous periods in the future.

The 2003-2007 bull market was based on false growth created by spending money we didn’t have, in order to avoid having a mild recession. Now we’ve created an even bigger mess, and presumably an even bigger recession. Eventually we need to pay the piper.

There is no quick fix to our problems because our problem is not lack of available credit or lack of confidence – our problem is lack of reasonable expectations. Until we, as a society,  change our mind set about what is reasonable and normal, we can’t move on. We had a 20-year bull market, we had 25 years of housing price appreciation compressed into 5, and we had commodity prices triple this decade. These things are not normal. Artificially pushing up prices faster than is warranted just leads to a bubble, not sustainable growth…

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