Republican or Democrat Presidents: Which Are Better for the Stock Market?

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Certain debates among Americans have achieved iconic status. Everywhere you go across this nation, people will line up on one side or the other of questions like "Coke (KO) or Pepsi (PEP)?" or "McDonald's (MCD) or Burger King (BKW)?" Personally, I like Coke. And In-N-Out is my burger of choice because I'm a rebel.

But when it comes to the stock market, the question is always, "Does the market do better under a Republican or a Democratic president?" In 2012, a report titled "US Market Performance Since 1900: Republicans Versus Democrats" was released by CMC Markets, a major financial research company -- ironically, based in Canada -- which attempted to answer the question once and for all.

The report has a number of surprises in it, including the fact that although Ronald Reagan and Franklin Roosevelt had impressive overall returns over the course of their terms -- 125 percent and 201 percent respectively -- it's actually Calvin Coolidge, a Republican, who comes in at the top spot with a total return of 269 percent during his time in office.

%VIRTUAL-WSSCourseInline-975%However, on the whole, the stock market has performed better under Democratic presidents than under Republicans. Much, much better. The average monthly return under Democrats was 0.73 percent versus 0.38 percent for Republicans, and Democrats posted an average yearly return of 15.31 percent against 5.47 percent for their political counterparts.

So that finally puts this question to bed, right? Well, not quite.

As with any study, results and conclusions are shaped by the data you input. This study only looks at the Dow Jones Industrial Average as a benchmark, since the S&P 500 wasn't created until 1957, and the Nasdaq composite wasn't launched until 1971. Some will argue that the Dow is too narrow of an index, one that didn't evolve with the economy, and doesn't represent a broad enough slice of the market.

Another problem involves comparisons between extreme economic booms and busts. Herbert Hoover, a Republican, came into office after his party-mate, Coolidge, and his record run of market prosperity. Eight months later came the crash of 1929. It could be argued that the market gains under Coolidge were so rapid and so speculative that a crash was inevitable, something that Hoover could not control.

The same argument in reverse could be made for FDR's presidency. Coming into office after the crash, the bar was set so low that any reasonable improvement in the market would notch large percentage gains on a year-over-year basis.

Of course, the real problem with the study -- and the point investors need to keep in mind -- is that the U.S. president has only limited power to effect real change in the economy or the stock market. The real drivers of the market are macroeconomic trends (most of which are driven by private industry) and macro-political trends (like wars, taxation and austerity) that are driven by Congress.

In fact, there's a school of thought that says the best time for the market is when there's conflict between Congress and the presidency, which renders them both impotent, and allows private industry to innovate free from government intervention.

%VIRTUAL-article-sponsoredlinks%A classic example of this was the economic boom of the mid- to late- '90s when the markets hit record highs. That includes the Nasdaq composite (^IXIC), which more than quadrupled in two years, then plummeted by the same amount in the next two. To this day, it has not reached that high water mark again (though it has more than tripled from its post-bubble low).

Democrat Bill Clinton was president then, and the stock market had overall returns of 227 percent. But Clinton's two terms were also known for intractable conflict between the Republican-majority Congress and the office of the president. Some will assert that this allowed a new technology, the Internet, to grow unobstructed and unregulated by a government that was too busy beating up on itself.

That technology spawned or supercharged companies such as Amazon (AMZN), eBay (EBAY), and Microsoft (MSFT), which drove the stock market upward and became household names.

So as an investor, you need to remember that bull markets and bear markets have very little to do with the commander in chief and more to do with an overall economic and political climate that's conducive to growth and innovation in the companies that make up the stock market.

No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best -- Top Trading Tips for Our Time."

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Originally published