Re: the Dems are better for Capital?

["Max B. Sawicky" <sawicky@xxxxxxxxxxxxxxxx>]

I did a similar piece on my website but in reference to
investment spending.  Includes a colorful chart.

http://maxspeak.org/gm/archives/00001569.html

mbs

-----Original Message-----
From: PEN-L list [mailto:PEN-L@xxxxxxxxxxxxxxxx]On Behalf Of Devine,
James
Sent: Thursday, November 20, 2003 12:33 PM
To: PEN-L@xxxxxxxxxxxxxxxx
Subject: the Dems are better for Capital?


[see comment at end.]

November 20, 2003/New York TIMES.

Which Party in the White House Means Good Times for Investors?
By HAL R. VARIAN

DOES the stock market do better when a Republican is president or when a
Democrat is?

The answer is: It's not even close. The stock market does far better
under Democrats.

This perhaps surprising finding is examined by two finance professors at
the University of California at Los Angeles, Pedro Santa-Clara and
Rossen Valkanov, in an article titled "Political Cycles and the Stock
Market," published in the October issue of The Journal of Finance.

Professors Santa-Clara and Valkanov look at the excess market return -
the difference between a broad index of stock prices (similar to the
Standard & Poor's 500-stock index) and the three-month Treasury bill
rate - between 1927 and 1998. The excess return measures how attractive
stock investments are compared with completely safe investments like
short-term T-bills.

Using this measure, they find that during those 72 years the stock
market returned about 11 percent more a year under Democratic presidents
and 2 percent more under Republicans - a striking difference.

This nine-percentage-point excess can be broken down further into an
average 5.3 percent higher real return for the stock market and a 3.7
percent lower return for Treasury bills under Democratic
administrations.

This finding raises three other questions. First, is this just some data
anomaly resulting from selective choice of sample or quirks of the
analysis?

Second, if the effect is real, why don't investors take advantage of the
predictable higher returns and buy stocks before elections that
Democrats are likely to win, in that way pushing stock prices up and
lowering returns? The third, and perhaps the most provocative, question:
What is the economic rationale for the difference in returns?

Most Democratic administrations clearly had higher-than-average excess
returns, with Franklin D. Roosevelt's second term (1937-41) being the
only significant exception. Republicans have been associated with
lower-than-average returns, with the only significant exception being
Dwight D. Eisenhower's first term (1953-57).

The difference in returns persists even if one looks at subsamples. For
example, if you break the sample in two at 1963, the Republicans still
come out with lower returns in both periods.

What would cause such a large difference? One possibility is that Wall
Street investors expect the Democrats to be bad for the market and sell
their stocks before elections that the Democratic candidate is likely to
win. Then, when the Democrats do not prove as bad as expected, stock
prices rise again.

The authors, though, find that the data do not support this theory -
stock prices generally do not tend to decline before elections that
Democrats win.

But this finding itself raises another puzzle. If returns are so much
higher for Democratic presidents than Republican ones, shouldn't we see
investors rushing to the market when a Democratic victory looks likely?

We don't see that happen, either. "In sum,'' the authors write, "the
market seems to react very little, if at all, to presidential election
news."

Here's another theory. Economic policies under Democratic
administrations may tend to be more volatile than those under
Republicans - so investors demand higher returns to compensate them for
the extra risk. A clever idea, but it is also contradicted by the
evidence. If anything, the volatility of stock market returns is
slightly higher under Republicans than under Democrats.

One interesting finding is that although both large and small companies
do better under Democratic administrations, small companies do
especially well, while larger ones do only a little better. The return
on the smallest 10 percent of traded companies is 21 percent higher
during Democratic administrations, while the return on the largest 10
percent is only 7.7 percent greater. What accounts for this difference?

We don't know.

Of course, there is always the possibility of a spurious correlation. As
econometricians say, "If you torture the data hard enough, it will
confess to anything." People have been looking for economic predictors
of stock market behavior for decades, so it's not surprising that every
now and then we find some correlations.

Still, presidents like to think - or at least claim - that they
influence economic activity. So a finding that the party occupying the
White House has an impact on stock market performance should mean
something.

With respect to the questions asked above, Professors Santa-Clara and
Valkanov can give a firm answer only to the first: Stock market excess
returns have definitely been higher under Democrats than under
Republicans.

They also show that some tempting possible answers to the question of
why investors don't take advantage of this difference do not work.

They do not try to answer the last question, but they conjecture that
the fiscal and regulatory priorities of presidents offer a possible
explanation.

Most provocatively, they suggest that the causality might go the other
way, with market returns driving presidential elections. Perhaps voters
feel wealthier when stock prices are high and then vote Republican; when
stock prices are low, they vote for Democrats.

The Santa-Clara/Valkanov finding offers an attractive area of research
for both economists and political scientists. But even if scholars
eventually come up with a satisfying explanation, we are still left with
the financial side of the puzzle: For at least 72 years, the stock
market did far better under Democratic presidents than under
Republicans. How can it be that investors have failed to take advantage
of this seemingly predictable pattern?

Professors Santa-Clara and Valkanov wrote the first draft of their paper
in 1999, and they admit that they could have profited handsomely by
selling stocks after the 2000 election. Alas, like most investors, they
didn't sell at the most opportune time. Even finance professors
sometimes misjudge the market.

------------------------

One theory is that the Democrats represent the long-term interests of
capital better than the GOP does. The Dems represent a (very)
watered-down version of social democracy, which seems to be good for
capital as a whole, while the GOP represents the immediate and
particularistic demands of the large number of individual capitalists.

------------------------
Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine