Divided Government Is Best for the Market

On September 12, 2008 Donald L. Luskin, chief investment officer at Trend Macrolytics LLC., wrote an editorial for The Wall Street Journal.  Here is an excerpt:

"So there you go. Forget about the tax increases. Forget about the regulations, the protectionism, and the union influence. Democrats are great for growth. The study proves it!

I've run the numbers myself. Superficially at least, the Democratic claims are true: Since 1948, the Standard & Poor's 500 total return (capital gains plus dividends) has averaged 15.6% when a Democrat was in the White House and only 11.1% when a Republican was in the White House.

You get a similar result if you look at growth in real gross domestic product. Under Democratic presidents, the average since 1948 has been 4.2%. Under Republican presidents it has been only 2.8%.

But it's not so simple when you study that "study." First, not all Democrats act like Democrats, and not all Republicans act like Republicans. John F. Kennedy, for example, was an enthusiastic supply-side tax cutter, and George H.W. Bush raised taxes. Bill Clinton promoted free trade, and Richard Nixon imposed wage and price controls.

If you assign those four presidents to the opposite party based on that -- make the two Democrats into Republicans and the two Republicans into Democrats -- the numbers completely reverse. Now stocks average 14.7% under Republicans and only 10.5% under Democrats.

In fact, it turns out that if you do just one single switch -- if you make Richard Nixon into a Democrat -- it's enough to reverse the numbers. Then stocks average 14% under Republicans and only 12.1% under Democrats. This fact discredits this whole study more than it does Republicans, or even Richard Nixon himself. Any analysis that can be undone by omitting or changing a single data point isn't very robust."