From the March 2008 issue of Research Magazine • Subscribe!

March 1, 2008

Bulls, Bears & Presidents

It was a tumultuous election year. The incumbent president, having served two terms, was not running. His party faced what looked like an uphill fight to hold the White House. The weakened economy had been wracked by financial crises. Public resentment of financial institutions was on the rise, and much political rhetoric struck a note of strident economic populism. The stock market slid to new lows.

However up-to-date that synopsis might sound, it's about the long-ago events of the 1896 presidential race. The incumbent was Grover Cleveland, the populist rhetoric came from candidate William Jennings Bryan, and a recently minted market measure known as the Dow Jones Industrial Average reached its lowest level ever before recovering after the election of the pro-business William McKinley.

The financial sector and presidential election politics have long been intertwined. Not only do markets unavoidably get affected by the political process, but the financial industry itself sometimes shows up in the political spotlight. When that happens, there's often some harshness to the glare, as politicians decry economic problems and point a finger of blame in the direction of Wall Street.

Such was the case in the pivotal election of 1896. Cleveland, a conservative Democrat, was stepping down, having lost power within the party to its agrarian wing, led by Bryan. The economy had gone into a steep downturn after a spate of financial turmoil known as the Panic of 1893. And whereas Cleveland had staunchly supported the gold standard, Bryan demanded "free silver," meaning linking the dollar to the fast-growing silver supply to help farmers and laborers pay off their debts.

While McKinley, the Republican nominee, ran a sedate "front porch" campaign centered on his home, Bryan traveled around the country, addressing crowds in his booming voice, and railing against the bankers and moneyed interests that backed the gold standard. Hearing complaints that his candidacy was undignified, Bryan responded: "I would rather have it said that I lacked dignity than that I lack backbone to meet the enemies of the government who work against its welfare in Wall Street."

On July 9, 1896, addressing the Democratic convention in Chicago, Bryan spoke what would be the most remembered words of his life: "You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold." He then held his arms up as if being crucified, holding that pose for five seconds.

This kind of thing contributed to the Panic of 1896, with markets sinking on the mere possibility that Bryan would win the presidency, even though it was generally assumed that McKinley held the electoral edge. The Dow, which had stood at 40.94 when it was first published on May 26, 1896, sank to its all-time nadir of 28.48 on August 8.

On November 3, McKinley won the election with 271 electoral votes to Bryan's 176. Call money rates, which had spiked the day before the election, returned to normal levels. The Dow, which had drifted upward for several months on growing expectations of a McKinley victory, now pushed firmly above the 40 line, marking the start of what would be called the "McKinley boom." By the end of 1900, it would be above 70.

The Post-Crash ElectionSeveral decades later, another Republican president, Herbert Hoover, also would have his name attached to a rising stock market. But not for long. Hoover won the 1928 election with 58 percent of the vote amid a buoyant prosperity. The Dow, which had first hit 100 in 1922 and moved above 200 in 1927, closed 1928 at exactly 300. Hoover took office on March 4, 1929, and stocks continued rising briskly for the next six months. The euphoria was called the "Hoover bull market."

The high point came on September 3, with the Dow closing at 381.17. The Great Crash began on October 24, or Black Thursday, and by the end of October 29, Black Tuesday, the Dow was at 230.07. The market would go steadily downhill for the next several years, bottoming out at 41.22 on July 8, 1932 -- wiping out not just the Hoover bull market but gains going back all the way to McKinley.

With the Depression in full swing, Hoover faced bleak prospects in the 1932 election. As Republican Senator Dwight W. Morrow glumly noted, "Any party which takes credit for the rain must not be surprised if its opponents blame it for the drought."

Franklin Delano Roosevelt, accepting the Democratic nomination for president in July, gave a speech describing the pre-crash boom in dark terms. The corporate profits of the 1920s, he complained, had not adequately translated into lower consumer prices or higher wages or even higher dividends. Expanding upon his campaign theme of fighting for "the forgotten man," FDR now added a new category: "The stockholder was forgotten."

Roosevelt won the 1932 election massively, getting 472 electoral votes to Hoover's 59. The stock market barely blipped with the election, though it did rally past the 100 level after Roosevelt took office in March 1933. FDR had campaigned on the promise of a balanced budget, but his New Deal program emphasized deficit spending and public-works projects. The economy remained weak through the 1930s, and the Dow closed the decade skirting the 150 line. It would not be until November 23, 1954 -- a quarter century after the Crash -- that the market would ascend again to its pre-crash high.

Wall Street "Bloodsuckers"The 1948 presidential election was another one in which the financial world was prominently at issue. That's because FDR's successor, Harry S. Truman, opted to run rather forcefully against Wall Street, in the course of defending his office from the challenge posed by Republican candidate Thomas E. Dewey.

During the campaign, Truman attacked "Wall Street reactionaries" and "gluttons of privilege." He said a Republican victory would empower "bloodsuckers with offices in Wall Street...princes of privilege...plunderers." These were, he warned, "the most reactionary elements," "silent and cunning men," who would "skim the cream from our natural resources to satisfy their own greed." They would, he said, "tear the country apart," and also make it "go to the dogs."

It might seem odd in light of such rhetoric, but Truman's administration had some financiers in high-level positions. Commerce Secretary W. Averell Harriman had come from Brown Brothers Harriman, as had Under Secretary of State Robert A. Lovett. Defense Secretary James V. Forrestal was from Dillon Read.

As for Truman's opponent, Dewey had started his career as a Wall Street lawyer but before long had given that up to become a prosecutor. Similar to a later Republican prosecutor-turned-politician named Rudy Giuliani, Dewey was known not only for going after gangsters but also for tackling malfeasant financial titans. In the late 1930s, District Attorney Dewey indicted Richard S. Whitney -- once known as the "Monarch of Wall Street" -- for misappropriating funds, and the financier ended up doing time in Sing Sing.

Dewey was the favorite to win, and he ran a cautious campaign. Truman was feisty, and on November 2 he pulled off one of the greatest election upsets in American history. The president got 303 electoral votes to Dewey's 189, with another 39 going to Strom Thurmond's Dixiecrats. The next morning, Truman posed for what would be a famous photo of him with an erroneous newspaper headlined "Dewey Defeats Truman."

The market promptly slumped after Truman's victory. The Dow, which had closed October at 188.28, finished November at 171.2. The market would bottom out in mid-1949, with the economy in recession, before beginning a long upward path that would last through most of the 1950s.

Back to the PresentPolitical rhetoric has gotten more subtle in some ways in recent decades. It's hard to imagine a president or major candidate nowadays talking about "bloodsuckers with offices in Wall Street." Still, economic and financial problems rank high on the political agenda this election year, and politicians can be expected to direct a certain amount of critical attention to the financial services industry.

Indeed, they already have been doing so. "Wall Street shifted risk away from the people who knew what was going on and onto the people who did not," said Hillary Clinton last December, referring to the subprime mortgage debacle. Nor are such sentiments found only on one side of the political aisle. Mike Huckabee has pointedly said he is "not in favor of the Wall Street crowd," and that he's a "Main Street Republican," as opposed to one linked to a certain street in lower Manhattan.

So, expect a few political zingers to fly at the financial industry in this election year. With any luck, they'll be a lot less sharp-edged than some of yesteryear's barbs.

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Seeking a CycleAcademics and Wall Street pundits alike have long searched for patterns in the relationship between markets and elections. A prominent theory is that of the "presidential election cycle," which notes that stocks have tended to rise in presidential election years and in the years preceding election years. It's often assumed this is because administrations step up efforts to stimulate the economy as the election approaches.

Economists Wing-Keung Wong of the National University of Singapore and Michael McAleer of the University of Western Australia, crunching numbers for the period of January 1965 to December 2003, wrote that "in general, stock prices fell during the first half of a presidency, reached a trough in the second year, rose during the second half of a presidency, and reached a peak in the third or fourth year."

Of course, it's also possible that such a pattern owes much to coincidence. However, the presidential election cycle at least has a rationale as to why it should work -- because politicians spend more money to assure their own reelections. That gives the theory an advantage over some other statistical correlations. The "Superbowl indicator," for example, notes that stocks have tended to rise when teams originally from the National Football League, not the American Football League, have taken the trophy.

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Pocketbook VotingIt's a political truism that people "vote their pocketbooks." And they've been doing it for a long time. Here are some presidential elections in which economic issues played a major role:

1840 Incumbent Martin Van Buren, a Democrat, loses to Whig Party candidate William Henry Harrison. Voters are angered by the Panic of 1837, a flurry of bank failures many blame on the policies of the previous Democratic administration of Andrew Jackson, which had included Vice President Van Buren.

1876 A newly organized Greenback Party campaigns on a platform of inflating the economy with paper money to help indebted farmers. Republican Rutherford B. Hayes beats Democrat Samuel J. Tilden in the Electoral College, while losing the popular vote.

1896 Republican William McKinley runs on his signature issue of higher tariffs, defeating Democrat William Jennings Bryan, who campaigns against the gold standard.

1932 Amid the depths of the Great Depression, Democrat Franklin Roosevelt trounces Republican incumbent Herbert Hoover.

1948 President Harry Truman runs underdog campaign featuring anti-Wall Street rhetoric, and pulls out upset victory over Republican challenger Thomas Dewey.

1960 Democrat John F. Kennedy vows to "get the country moving again," after economic sluggishness of late 1950s; narrowly defeats Vice President Richard Nixon.

1980 Republican challenger Ronald Reagan unseats President Jimmy Carter. During campaign, Reagan notes the increase during the Carter presidency in the "misery index," a combination of the inflation and unemployment rates.

1992 The economy is recovering from recession, but not in time to save Republican President George H.W. Bush from defeat at hands of Democrat Bill Clinton.

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Kenneth Silber is a senior editor at Research. His work on science, economics and history has appeared in a variety of publications, including The Wall Street Journal

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