For the last several months we have been inundated with comments from the left and the right that when their candidate wins the presidential election the stock market will do better.
The conventional wisdom is that Republicans are viewed as pro-business which should therefore be a boost to the stock market. Whereas, statistically the stock markets actually do a bit better if there is a Democrat in the White House, if you measure from the first day they take office to the last.
However, before jumping to any conclusions, maybe it is healthy to consider the Super Bowl Indicator.
This indicator suggests that if the Super Bowl is won by an old AFL team that the stock market will have a bad year. Conversely, if the Super Bowl is won by an old NFL team the stock market will have a good year.
Amazingly, the Super Bowl Indicator has about an 80% accuracy rate. Despite this, most people are smart enough to know that high correlation does not equal causation. The things that move the stock market cannot be boiled down to one simple tidbit of trivia.
The same is true with the presidency.
Obviously, the president is quite powerful. However, we do not have a dictatorship. The president cannot just wave a magic wand and do whatever. No matter how strongly any president feels about a given topic, he must still get the majority of 100 Senators and 435 members of the House of Representatives to go along with him on most major issues. This requires a tremendous amount of compromise.
Although all presidents weigh in on matters of tax policy, the president does not set tax rates. The same is true for benefits associated with unemployment, social security, Medicare or Medicaid. Similar arguments can be made for Federal Reserve policy and influencing interest rates. Despite the fact that we have record low interest rates, the president cannot force banks to lend out money nor can he force businesses to borrow. Additionally, the president cannot force businesses to hire, or citizens to be employable.
A smart investor also must consider the set of circumstances that each president inherits.
Our nation experienced a recession in 1991 under republican George H.W. Bush. We were already coming out of that recession by the time that Bill Clinton entered his eight year run in 1992. If Bush had won, he would have been credited with the economic recovery. Instead, Clinton gets the credit for a foundation that was built prior to his tenure.
By the time Clinton left office, the economy and stock market (especially tech and internet stocks) were clearly overheated. As George W. Bush entered office he inherited a stumbling stock market and a shuddering economy. George W then experienced the impact from the 9/11 bombings and the economic problems that ensued.
Who should get credit for the strong stock market of the 90’s—Bush or Clinton? Should Clinton or George W be saddled with the tech implosion in the early 2000’s? Who gets the burden of 9/11? All of the sudden, this seemingly easy answer is not so easy.
Additionally, much of the simplicity in assessing a presidency and its impact upon the markets directly relates to the variables that are included. Very simple and slight changes to these assessments can produce significantly different results.
For instance, one article crediting democratic leadership for strong stock market performance conveniently started in 1929—the peak of the stock market bubble and the Great Depression. However, if you move your start date just a small amount you derive very different results. An article published by Theodore Gray in 2008 shows that just removing the impact of the Great Depression boosts the returns under republican leadership by nearly 500%.
Intelligent investors should understand just how fragile and flawed many of these supposed “studies” can be. Many times you can modify one slight variable and get a dramatically different outcome.
Given all of this, it should be understood that the President of the United States is a powerful and important man. However, he does not control all and cannot be looked upon as an effective indicator of what our stock markets will do.
Dave Sather is a Victoria Certified Financial Planner™ and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.
Originally published Thursday, September 18, 2012
Victoria Advocate