Judging by historical returns Democrats are much better for markets! In an article published by economist Jeremy Siegal on Yahoo Finance (9/5/08), the presidential administrations over the last 120 years were evaluated against stock market returns. On average, markets have risen 10.9% when the reigning presidents were Democrats, while only 8.3% when Repubicans were in charge. Conventional wisdom is that Republicans are stronger on the economy, while Democrats tend to be further to the Left ideologically. How is it, then, that Democrats dominate markets?

Everyone who has taken a statistics course (or stayed awake in one, for that matter) knows that correlation does not 100% of the time mean causation. Simply put, stocks going up might have absolutely nothing to do with the presidency. A good example would be to equate the stock market with the number of clouds in the sky. One could collect data that just happens to suggest the cloudier the sky the worse the market. In this dataset, markets and cloud cover are correlated, but no sane person would bet his life savings on the cloud cover.

More specifically, consider the following two instances and decide for yourself: In 1928 Herbert Hoover (Republican) took office during the height of a speculative stock market bubble. The following year the bubble shatters and we have the great crash of ’29. Did Hoover have anything to do with that? Not likely since he came to power at the peak of a frenzied speculative bubble.

Next, consider whether or not Bill Clinton had anything to do with the internet revolution that sparked one of the largest speculative stock bubbles in our time? Did his coming to power (instead of a Republican) have any influence in development and commercialization of the internet? Did he have any personal hand in crafting the democratization of finance that led to a revolution in global capital flows? It’s 99.9% certain that if someone else came to power at that time these events would have occurred nonetheless.

Serious investors understand that betting on presidential cycles is a losing proposition. There are a million things that can impact markets – the President perhaps being one of those – but to attribute better stewardship of the economy (and markets) to Democrats based on historical market return data is premature. The major global events that shaped markets over the last century would likely have occurred regardless of which party held office.