Turn Back the Clock to Gain Perspective

Thomas R. Kosky, MBA

Physician's Money Digest, November15 2004, Volume 11, Issue 21

One of the main issues in this year's presidential election was the economy. Having watched the three debates, I came to the conclusion that neither candidate seemed to have a definitive plan for addressing the problems facing Social Security, health care, employment, the deficit, or education. In other words, neither one has really addressed how they plan to put the country back on the path to economic prosperity. With that said, by the time you read this article, the 2004 US presidential election will already be history.

As I consider the stock market to be a reflection of the overall health of the US economy, I was curious to find out how the market has performed in the past under both Republican and Democrat administrations. Of course, the past really has little, if any, bearing on the future. I researched it more out of intellectual curiosity.

Elephants vs Donkeys

In the past 75 years, the stock market, as measured by the Dow, has returned approximately 10% on an annual basis. I conducted further research to obtain a historical perspective on how the Dow has not only performed since the turn of the 20th century, but also how it has performed when Republicans and Democrats were in office. The time period in question extends from 1900 through 2003.

This timeframe encompasses a period during which there were 19 administrations, from President William McKinley through President George W. Bush; two world wars; the Great Depression; two assassinations; four assassination attempts; the Korean, Vietnam, and Gulf Wars; the wars on terrorism in Afghanistan and Iraq; one impeachment; and one resignation. During this period, Republicans occupied the White House for 57 of the past 104 years, while Democrats occupied the White House the remaining 48 years (see Table).

Interestingly, the average return in terms of the absolute percentage gain in the Dow year over year averaged 8.5% when Democrats occupied the White House and 6.6% when Republicans did. Keep in mind that these percentages do not factor in dividends. With dividends factored in, the results would be greater; however, the same relative disparity in returns would still exist, whether or not the Republicans or Democrats were in the White House.

Merely a Lesson

This was only meant to be a history lesson. Please do not run out and adopt an investment strategy based on who is in the White House. Again, it comes back to asset allocation. In fact, an early 1990's study by Gary Brinson, Brian Singer, and Gilbert Beebower shows that the attribution of investment returns has little to do withmarket timing or security selection, and a lot to do with asset allocation.

and his partner, Harris L.

Kerker, are principals of the Asset Planning Group

in Miami, Fla, specializing in investment, retirement,

and estate planning. Mr. Kosky teaches corporate

finance in the Saturday Executive and

Health Care Executive MBA Programs at the

University of Miami. He welcomes questions or

comments at 800-953-5508, or visit www.assetplanning.net.

Thomas R. Kosky