Pick Your Poison

Story Highlights:

• History shows a party change in the White House is benign for stocks in election years. Whatever the outcome there's no need to fear a change in executive political leadership.
• Myths abound for how stocks react to an incoming Democratic or Republican Commander in Chief.

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[Editor's Note: As always, MarketMinder remains agnostic to political affiliation. We believe siding with one party or another creates harmful biases clouding investing judgment. Thus, we favor neither side in our analyses and attempt to be as objective as possible.]

Some fear a Donkey in the White House next year; others, another Elephant. Either way, stocks are unlikely to flinch based on an executive leadership change alone.

There've been a lot of US elections. Some had wacky results; some were predictable. Looking back at elections and how markets react to them reveals important clues for interpreting today's situation and how it may affect stocks in 2008.

We'll have a great deal more to say about the election as November draws closer. For today, let's start with one of the most common fears: How will stocks react to a leadership change in the White House?

Regardless of party, a change in executive leadership isn't historically bad for stocks. If you fear a Democrat taking the White House, you shouldn't. From 1928 to present, White House changes from Republican to Democrat averages a 5.8% return for the S&P 500 in the election year and 20.7% in the inauguration year. Obviously, we can't have a change from Democrat to Republican this time around, but in cases where it did happen, the shift still averages a 13.2% return in the election year, and a slightly negative -6.6% return in the inauguration year.

Note that in election years where Democrats take the White House from the Elephants, stocks tend to do OK, but better in the inauguration year. Conversely, when a Republican seizes the Oval Office from a Donkey, stocks do well in the election year and fall into negative territory in the inauguration year. But in either case, presidential election years where there is a party change have fine stock returns on average.

Why might this be? It probably has something to do with how folks perceive the winning candidate's party. It's stereotypical to believe "tax-and-spend Democrats will be bad for business," while "Republicans will spend responsibly and be friendly to business." Neither ends up true in practice.

The fact is neither Donkeys nor Elephants make good on campaign promises very often. Nevertheless, during the election year folks worry over Democrats ruining business (so stocks produce tepid returns in election years), only to find in the inauguration year it won't be as bad as feared (stocks then do better in inauguration years). Conversely, folks believe a Republican will be good for business (stocks rise nicely in the election year), only to find out in the inauguration year it won't be as good as hoped (the disappointment produces negative stock returns in inauguration years).

Right now, and despite prognostications everywhere you turn, the election is still uncertain and anything could happen. We cannot say yet which party will win, or by how much. But a simple view of history shows common market hopes and fears generated from new party leadership in the White House are usually misplaced. So don't fear a change. It's one less thing to worry about in an already eventful year.