Save and Conquer

I like to think of myself as politically moderate. I don’t like wild swings of the Government to either side of the political spectrum. I like things best when the Executive is from one party and the Congress is another. I like that a split-party government has to make concessions across party lines to get anything done.

I am curious if the market does better when the Government is split-party or when it is all under one party. Both Republicans and Democrats would have you believe that things are better when the Government is all their party, because that is when they “can get things done.”

I am too young to recall much of the 1960s from an economic standpoint. I had a hand-me-down bicycle, a paper route, and a savings account, but that was all that I knew about economics. I got my first real job in the 1970s and started wanting to save big and buy big things. It was tough to save in the 70s, so I didn’t get to buy many big things. I went back to school and got my current engineering job in the 80s. Things were much better. They stayed good through the 90s. The New Millennium got off to a bad start with the election of 2000, the collapse of the internet bubble, and 9/11, but then the market was good again from 2003 to 2007. Lets take a look at which party was in charge of which government branch from 1970 to the present.

On the whole through that period, the S&P 500 has done rather well. Let’s look at the negative years for the S&P 500.

1973 and 1974 were bad years, down 18.09% and 29.81%, respectively. We had a Republican in the White House and Democrats in Congress. That was the era of Tricky Dick Nixon, “I am not a crook,” the ousting of Spiro Agnew, and the hand off to Gerald Ford. The market did not like that era.

The next bad year was 1977, down 11.12%. Democrats ruled. Actually, OPEC ruled, at least the oil supply, and the economy had gone into stagflation.

1981 was a bad year for the market, down 10.11%. Reagan, the Republican, was in office. The Senate was Republican, but the House was Democrat. It turns out, 1981 was really the last gasp of stagflation. The first Reagan tax cuts were done in 1981 but the market didn’t rebound until 1982. (As an aside, in 1982, Reagan realized the cuts were too big, and undid about a third of the 1981 tax cuts. And then increased taxes again in 1983 to keep Social Security and Medicare solvent. Too bad Congress did not save that money as was spelled out in the Social Security Reform Act. But that is another subject.)

1990 was a bad year, down 8.19%. We had a Republican President while both houses of Congress were Democrat. Lots of banks failed at that time due to deregulation of the savings and loan banks and the scandals that followed.

1994 was down, but barely. Only 0.92%. We had a Democrat President and both houses of Congress were Republican. The Fed raised the funds rate from 3.25 to 5.5 during 1994, so that was probably the main cause.

2000, 2001, and 2002 were really down: 9.27%, 10.53%, and 23.80%, respectively. The President and both houses of Congress were Republican. We know 2000 was mostly due to the internet bubble bursting. (Some people might say that the uncertainty of the presidential election had an effect as well, but I don’t think so. It may have had a very short-term affect, but the money in the market was lost due to bad business practices during the internet bubble.) 2001 was the remainder of the internet bubble bursting and the tragedy of 9/11. 2002 was the fallout from 9/11, the war in Afghanistan, and the uncertainty leading up to the Iraq war.

So, can any of this be used to predict what the market will do if we have the likely scenario of the Executive branch and both houses of Congress being Democrat after 2008? The short answer is: Probably not. All of the explanations of the down years for the market were mostly due to extenuating circumstances and not strictly party affiliation. Sure, there were politics involved, big time, but there does not seem to be a direct correlation between the affiliation of the parties of the Executive branch and the houses of Congress that directly affected the stock market.

Stumble it!