Link Between Presidents, Stock Returns Is Dubious

Is the market implosion President Bush's fault?

Stocks are down 10% since Bush took office. During Clinton's terms, the S&P 500 index tripled in value to cross the 1300 mark. Given that we're just a few weeks away from picking our next prez, voters who prefer to profit off their investments might wonder if there isn't something to these numbers. Especially since history shows that stocks do increase more when a Democrat is in the White House.

But that sort of thinking is just the same ol' politics as usual. Being partisan is fun sometimes. But it's not conducive to having a firm grasp of reality. A closer look at the stats demands more, well, nuanced thinking, if you will.

The most relevant and oft-repeated statistic is this: Since 1948, the S&P 500 averaged a nearly 16% return when a Democrat has been president vs. 11% when a Republican was. As with most stats, however, context matters. Which party controls Congress, how long it takes to get a president's policies implemented, etc., can affect the market, just as the timing of market events can affect presidencies.

Take the Clinton-Bush dichotomy. Stocks boomed under Clinton. But his term coincided with the irrational exuberance of the tech bubble, and stocks were falling by his last year in office. The S&P lost 9% in 2000. Bush's presidency then began with the bubble in full burst. In addition, the Sept. 11, 2001, terrorist attacks happened. Stocks fell by the double-digits in 2001 and 2002.

"A major challenge with predicting how the market might react to one candidate compared to another is that it simply gives too much credit to a president's ability to make a real difference in terms of the economy," Brent Brodeski, managing director of Savant Capital Management, said in August in a statement on presidential politics and the stock markets. Brodeski's firm has more than $1 billion in assets under management, and in his view, "Presidents certainly react to current economic conditions, but that doesn't mean that they can actually control them."

One lesson from bubbles is just how far stock prices can get detached from fundamentals like earnings. Various studies posit that investor "mood" can move the market in erratic ways. For example, a study called "Congress and the Stock Market" argues that stocks do particularly well when an unpopular Congress is out of session. Another study, "Can Political Factors Explain the Behavior of Stock Prices," argues that presidential popularity, military conflicts and election campaigns also sway stock prices.

Bottom line, it doesn't make much sense to vote based on how you think the president will affect the stock market. But if you want some partisan fodder for the next dinner party, the chart below is a start.