A History Lesson in Stock Market Returns

Physician's Money Digest, February 2007, Volume 14, Issue 2

No matter which political party is in power,over the long haul, equities have alwaysoutperformed fixed-income investments by a substantialmargin. However, if we examine the returns onlarge company stocks and small company stocks overthe past 80 years, there is a noticeable difference inreturns depending on which political party is in power.

Reexamining the Past

As I consider the stock marketto reflect the overall health of theUS economy, I was curious to find outhow the market has performed in thepast under both Republican andDemocratic administrations—not thatthe past really has much, if any, bearingon predicting what will happen inthe future. I selected the past 80 yearsfor examination.

During this time period, the stockmarket, as measured by the Dow(which is not necessarily the bestgauge of the broader market), hasreturned approximately 10% on anannualized basis. The time in questionextends from 1927 through 2006. Asof the writing of this article, year-enddata for 2006 is not yet available, butthe past year is shaping up to be thebest year we've had since 2003 foroverall market returns.

During these years the following significantevents occurred: 14 presidentialadministrations from Calvin Coolidge(30th president) through George W.Bush (43rd president); the GreatDepression; World War II; the KoreanWar; the Vietnam War; the Gulf War;the Iraq wars; the continuing war onglobal terrorism; one presidential assassination;one presidential resignation;and one presidential impeachment.During this time period, Republicansoccupied the White House for 40 of thepast 80 years, as did the Democrats.

A Party Correlation

If you examine the data in Chart Aand Chart B, you will find that with aDemocratic House and Senate, bothlarge company and small companystocks performed better than with aRepublican House and Senate.

In addition, if you were to examinethe performance of the broad stockmarket, you would have also found asimilar relationship—that under aDemocratic president the marketperformed substantially better thanunder a Republicanpresident. So, how dowe account for thisdisparity in returns?Will 2007 be anotherbanner year for stocks?One can only speculate.

Now that we have a DemocraticHouse and Senate, based on the abovestatistics, should you run out and purchasesmall company stocks hopingthat you will get a 19% or more rate ofreturn? Definitely not. This exercisewas meant only to be a history lesson.

Do not adopt an investment strategybased on who controls the US Houseand the Senate. Despite history's leanings,good investing always comes backto asset allocation. I cannot emphasizeenough the importance of a study Irefer to time and again in this columnconducted by Gary Brinson and GilbertBeebower during the early 1990s. Inthis study, it was shown that attributionof investment returns has little todo with market timing and securityselection, but is due overwhelmingly toasset allocation. Having monies investedin large, mid, and small cap growth,core and value companies both domesticallyand internationally, as well as infixed-income securities is a smarterstrategy than hoping that historyrepeats itself.

Thomas R. Kosky and his partner, Harris L.Kerker, are principals of the Asset Planning,Group, Inc, in Miami, Fla. The companyspecializes in investment, retirement, andestate planning. Mr. Kosky also teaches corporatefinance in the Saturday Executive and Health CareExecutive MBA Programs at the University of Miami in CoralGables, Fla. Mr. Kosky and Mr. Kerker welcome questions orcomments at 800-953-5508, or e-mail Mr. Kosky directly atProfessorKosky@aol.com.