Aug. 9, 2004 — As the presidential campaign heats up, many investors believe Republican presidencies are better for the market. After all, a lot of Wall Streeters are staunch Republicans, fearful of Democrats clamping down on corporate profits and raising taxes.

But in fact, investors are more likely to have happier days under Democratic administrations than under Republican administrations, based on investment returns since 1945. Since then, the S&P 500-stock index rose 10.7%, annualized under Democratic administrations, versus a 7.6% gain underRepublican administrations.

However, the re-election of presidential incumbents over challengers boosts the market more in first post-election years. In first post-election years since 1945, the S&P 500 was up 12.9%, on average, when incumbents won, versus a 3.2% loss when incumbents lost.

The reasons behind these election/market dynamics are unclear. Sam Stovall, Standard & Poor’s chief investment strategist, notes that economic recessions have occurred more frequently in Republications administrations. Since June 1899, two out of three recessions have begun under Republican presidents.

Another interesting pattern is that recessions tend to occur early in presidential administrations and to hit Republican administrations harder. The frequency of recessions may account for market underperformance under Republican presidents, but Stovall cautions that a direct connection between the two is unclear.

Currently, David Wyss, Standard & Poor’s chief economist, projects that President Bush will receive 55% of election votes, based on his model. So, for investors hoping to make investment decisions based on the election, the race may be too close to call.

Which market segments are likely to outperform either under a Bush administration or under a Kerry administration?

Since 1977, small caps have outperformed large caps, regardless of the political party in the White House. (They have done better, however, under Democrats than under the Republicans.) Also since 1977, value has also done better, regardless of the party in the White House.

POLITICAL PARTY SCORECARD: S&P 500 RETURNS SINCE 1945

Year One

Year One

Year One

Year One

Over Entire Period

Democratic Presidencies +14.2% +1.6% +17.3% +9.7% +10.7%
Republican Presidencies -2.4% +6.6% +18.7% +7.5% +7.6%
Average Since 1945 +5.4% +4.3% +18.0% +8.6% +9.1%
Post-Election Years Since 1945 S&P 500 Returns
Incumbent or incumbent party wins

+12.9%

Incumbent or incumbent party loses

-3.2%

Results from 1977 through 2003

S&P 500/Barra Growth

S&P 500/Barra Value

Large-Cap Returns: S&P 500

Small-Cap Returns*

Democratic Presidencies

+14.5%

+11.7%

+12.9%

+18.8%

Republican Presidencies

+8.4%

+7.6%

+8.0%

+10.7%

*Returns for 1977 and 1978 are based on Ibbotson data. Returns for 1979 through 1994 are based on the Russell 2000. Returns for 1995 through 2003 are based on the S&P SmallCap 600.

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.