Kenneth G. Winans, Contributor
Oct. 14, 2020
Since the beginning of our nation’s history, many politicians (from opposing parties) have been wealthy, successful investors. In fact, many congressional, senatorial and presidential campaigns have been financed by the fruits of the candidate’s (or their family’s) investment success.
Ultimately, investors (regardless of their political views) want is to see their stocks, bond and real estate holdings appreciate in value in real terms.
You might not be surprised to know that Reagan’s two terms showed a 138% increase in stocks and a 72% increase in home prices and 162% in corporate bonds (371% combined return), but the best one term was the obscure Rutherford B. Hayes (1877-80) when investments increased an amazing 369% in four years!
Contrary to what the business community believes, not all bull markets are generated on the Republican side. The best investment return for a Democrat was Clinton’s post-cold war eight year tenure of 263%. The 2nd best on record!
Clearly the well-followed scandals of the Reagan and Clinton administrations didn’t matter to Wall Street!
On the flip side, both parties have had bear markets on their watch. The Republican Hoover and Democrat Pierce posted disastrous investment losses. Finally, no president had the highs & lows of FDR. His administration made the lists for best & worst single terms.
What is clear is that voter patience with bear markets is limited and didn’t allow a president to serve a second term with large investment losses.
Wall Street pays attention to the presidential election cycle. According to The Investor’s Almanac, “Since 1833, presidential elections every four years have a profound impact on the economy and the stock market. Wars, recessions, and bear markets tend to start or occur in the first half of the term; prosperous times and bull markets.”
Elephants vs. Donkeys, who is the best political party for investors?
With a contentious election happening in less than a month and both sides claiming to be better for the economy, it seems like a good time to look at the long-term investment track record of both party’s presidential administrations.
Since 1900, the Republican presidential term has posted an average cumulative total return of 54% in stocks, 20% in home prices, and 36% in corporate bonds. Of the 15 Republican administrations, only 3 had declines in the stocks and home prices. See Table A
Since 1900, the Democratic presidential term has posted an average cumulative total return or 60% in stocks, 25% in home prices, and 21% in corporate bonds. Of the 14 Democratic administrations, only one had declines in the stock market and two saw declines in home prices. See table B
Both sides can find statistics to claim victory with. The Republicans posted a higher average & median investment returns of 109% & 117%, but Democrat presidents did posts noticeably higher average stock and housing appreciation due to Hoover’s disastrous 1929-1932 term. What is clear is that 21 st Century presidents haven’t matched the total investment results of their 20th century predecessors.
Who should investors pay the most attention to: The President, Congress or the Federal Reserve?
Since asset values are significantly influenced by changes in interest rates and taxation, investors should also keep an eye on the Federal Reserve and Congress.
The Federal Reserve and Interest Rates:
Historically, presidents has been praised & blamed for the economy while the Federal Reserve sets monetary policy out of public view. For instance, Hoover is the popular choice to blame for the Great Depression of the 1930’s while Federal Reserve Chairman Young is rarely mentioned for The Fed’s huge role in the disaster.
Up until Chairman Volcker’s fight against inflation with 20% interest rates in the early 1980, the public didn’t pay much attention to the Federal Reserve, and yet an argument can easily be made that the actions of this body have the most direct effect on the investment world.
Wall Street and Main Street have a love / hate relationship with the “Fed”, and there have been times they have wanted to “tar and feather” the Fed Chairman and abolish the Fed!
Has America economically performed better with the Federal Reserve at the helm in trying to control inflation and enhance economic growth?
Yes! In fact, economic growth is more stable under the Fed’s watch. Deflation is less prevalent, but inflation seems to still be a persistent problem since the Federal Reserve was established in 1913.
Historically, short-term interest rates were more stable in the early days of the Federal Reserve. From 1914-1951, there were eight different Federal Reserve Chairman and the Fed Funds Rate high/low range was within 2.4% (The highest inflation rate averaged 6.7%.). Since 1951, there have been six different Federal Reserve Chairman, and the Fed Funds Rate range increased to 9.6% (The highest inflation rate averaged 8.8%.). The 19-year tenure of Greenspan had a profound effect on modern day “Fed” policy where inflation was benign, yet short-term interest rates ranged widely from 9.9 to 0.9%.
Congress and Taxation:
The old saying of, “It’s not what you make, but what you get to keep” really holds true with investing and taxes. Taxes strongly influences what investments are used, when profits & loses are realized, and what type of accounts are used (taxable vs. tax-deferred). Over time taxes ebb and flow, and Congress has enacted a complicated maze of investment related taxes such as: income tax (with dividends taxed twice due to taxes pay by the corporate entity), capital gains, estate taxes, penalties for early and late IRA withdrawals just to name a few.
Income taxes were permanently imposed on U.S. citizens in 1913 and have been increased and reduced on 23 separate occasions. Top income tax rates have ranged from 15% (in 1916) to 94% (in 1944). The capital gains tax has ranged from 7% to 39.9%. In fact, there is a strong inverse relationship between the level of the capital gains tax rate and the performance of the stock market. During the mid-1930’s and 1970’s, this tax exceeded 30%, and the stock market performed miserably.
In today’s world of political correctness, it’s safe to say when it comes to economic mis-cues, there is plenty of blame to go around Washington D.C. Regardless of individual investor’s political ideals, everyone can agree that stable interest rates and fair tax policies that encourage investment are good for society.
So, who should investors pay the most attention to: The President, the Congress or the Federal Reserve?
Answer: All of them!
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