Saturday, October 18, 2008

Presidential Stock Market Returns, A critique

This in-the-tank-for-Obama New York Times chart purports to show how the Democrats are better than Republicans as President, by reaching back to the Hoover days.

The chart is dumb for many reasons:

1. It's hand selected to start with the worst performing stock market president ever, when starting at the top of a stock market bubble is the most distortive place to start a chart. But The idea that we should rate today's Republicans based on a President who presided before our parents were born is a real stretch. And btw, if you include Hoover, why not Harding, Coolidge, and Wilson?? We know why - it would make Republicans look better. Coolidge had the highest stock market returns of any President in history (and just happens to be the President before the cutoff in this chart): The stock market rose by almost 3 times over 5 years, about a 23% average return.

See this critique - the difference shrinks to almost nothing ($217,000 for Democrats, $156,000 for Republicans) by extending back further.

It gets really interesting if you extend the timeline back and make your initial investment in 1897. Now we see that the crash of 1929 was really the bursting of a bubble: the 12 Republican years of Harding, Coolidge, and Hoover were a wild ride, but more or less a wash in the end. (The Dow’s peak in 1929 would not be seen again until 1954! Imagine, 25 years including the worst depression and the greatest war the world has ever seen, and in all that time the stock market never reached the level it had for a few giddy months in 1929. Will it be 25 years before we match the Dow’s high of 2008?)

The wild ride is another way of saying the late 1920s stock market bubble and bursting was at work, and measuring only half of that distorts the numbers.

2. Looking at Presidents only ignores the Congressional effect. If you go by the congress, you will find that Gingrich Congress was quite successful, so was the Republican Congress from 2003 to 2007. But since 2007, the Democrats in Congress have presided over a significant drop in the stock market. A mutual fund "The Congressional effect" notes that

Likewise, it is not surprising that the stock market did well under Truman, as the conservative post-WWII Congress did a lot to "free up the economy" from the ravages of the New Deal. Note that FDR had the best baseline to work from ever, a stock market that dropped 90% 4 years prior, yet still had a mediocre return. The reason is simple: The New Deal was actually economic snake oil, it did no good and the economy sputtered along, making a recession into a 'great depression'.

3. YOU CANNOT IGNORE INFLATION. Historically, Democrats create more inflation. That boosts dollar denomiated returns artificially. It's just been their thing, either due to the Fed boards they've appointed or other mis-management factors. The #1 example was Jimmy Carter. In after-inflation real terms, Jimmy carter had the most negative stock market returns since Herbert Hoover. As a result, the REAL stock market returns favor the Republicans.

Furthermore, if you go back to Taft, you will see negative returns under Wilson as well, and a Republican advantage of $50,000 versus $25,000 in the after inflation return.

4. Lastly, we have to return to the fact of policies not party labels deciding stock market returns. It's not the party label its the actions they took that matter. Hoover and GHW Bush raised taxes. Hoover raised tarriffs. Nixon imposed wage and price controls. Once Gingrich took control of the Congress in 1994, we had a Government that was shrinking as a %age of GDP for the first time in decades! We see clear trends:

0) Harding and Coolidge policies of lower taxes after Wilson's failed economic policies created a boom

1) The failed Hoover administration and New Deal of high taxes, tariffs and intervention kept returns sub-par from 1930 to 1945.

2) Post WWII relaxation of Govt control of economy, from the Republican Congress of late 1940s right through to the Kennedy tax cuts, were good for the stock market. Free trade helped.

3) Johnson's Great Society and Nixon's wage and price controls and Jimmy carter's inept monetary policies hurt the economy and markets.

4) Reaganomics worked. Reagan's tax cuts and the deregulation of 1980s and 1990s put the economy on a big upswing. Clinton's policies, once he was paired with conservative Gingrich, followed the Reagan path more than deviated.

5) Under GWBush we have had tax cuts, but also increased regulation (Sarbanes-Oxley) and a govt-induced housing meltdown (due to CRA and subprime lending) that was fueled by Govt meddling and lax monetary policy.

The recipe for a good real return in the stock market is clear: Low tax rates, smaller Government, hard money monetary policies, and less regulation. It doesnt matter which party implements those policies or does not. that's the recipe that works.

Obama's economics are Hoovernomics: Higher tax rates - his tax plan, a bogus govt giveaway marketed as a 'tax cut', will actually raise marginal tax rates on the middle class; he promises more regulation, higher spending, less free trade, and with more bailouts, a poor fiscal and monetary position. There is very little reason to hang hopes for a good stock market return under obama, unless we get a Republican Congress along to hem Obama in.

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