by Jeremy Siegel, Ph.D. Posted on Wednesday, March 22, 2006 As President's Bush's popularity plummets and the outlook for the Republicans controlling both houses of Congress and the presidency fades, it is important for investors to ask: "Should this matter to the stock market? Are prospects of a Democratic victory in November bad for stocks? Certainly the recent behavior of the stock market says "No!" At the same time the woeful poll numbers were reported, stocks, measured by all the popular indices, hit 5-year highs. For the stock market to ignore Bush's unpopularity seems strange. The vast majority of large stockholders and active traders are Republicans, and Republican rhetoric is generally very market-friendly. The market's movement in the last presidential election indicates it preferred a Republican victory. The Bush-Kerry Election On the afternoon of Election Day, November 2, 2004, exit poll numbers were released from both Florida and Ohio that suggested Kerry was doing much better than expected. If the Democrats took Ohio or Florida, electoral math made it very difficult for Bush to win. Immediately upon the release of Kerry's supposed success, there was a sell-off in stocks. The Dow Industrials, which were up strongly early in the day, plunged about 100 points when the polls were released. But in the evening, the exit polls proved wrong, and Bush was the clear victor. The following day stocks made up all the lost ground and then some. Stocks Have Actually Done Better Under Democrats Despite the behavior of the market during the last Presidential election, over longer periods of time, the stock market has done significantly better under Democratic administrations. The accompanying chart shows stock returns under each occupant of the White House since the beginning of Harry Truman's second term. I have calculated the return from the end of the November election, since stocks will react to the policies of the incoming administration when it is elected, not when it takes office. See link for the table: http://finance.yahoo.com/expert/article/futureinvest/3022 The table tells the story. Since 1948, Republican Administrations have controlled the White House 57.2 percent of the time. But during the period that the GOP was in office, stock returns have averaged only 9.53 percent per year, while under Democratic administrations, stocks returned 15.25 percent per year, more than five percentage points higher. Stocks did best over the 8 years of the Clinton administration, with stock returns at 19 percent per year. Stock returns were above average during the Truman, Ford, Reagan, Kennedy, Eisenhower, and Bush Senior administrations. And stock returns were only slightly below average during the Carter and Johnson Administrations. By far the worst stock returns came under the Republican administrations of Richard Nixon and George W. Bush. Of course, even George W and Nixon cannot compare to the Great Depression era stock returns during the Republican administration of Herbert Hoover. During the 69 months from the election of President Nixon in November 1968 through his resignation in July of 1974, stock returns averaged minus 1.32 percent per year while inflation exceeded 6 percent. Similarly, during the 63 months since the election of George Bush in November 2000, stock returns have been negative. Who's to Blame? The poor performance of the stock market during these two Republican administrations cannot be pinned solely on the president. Nixon inherited a war in Vietnam that was escalated by Lyndon Johnson. Furthermore, the market endured increasing inflation that was due to bad Federal Reserve policy. Nixon however is to blame for appointing Arthur Burns as Chairman of the Federal Reserve Board, a man who did nothing to curb the rampant inflation. On the contrary, George W is largely blameless for the poor stock returns under his watch. Stocks were in an unsustainable bull market that peaked in March 2000 and then broke just before he was elected President. Bush was sworn in near the top of one of the greatest bubbles in history. In fact Bush's policies have been very favorable for the market. The reduction in the tax on capital gains and on dividends was a most welcome development for stockholders. Certainly the excessive government spending under this administration, including sizable deficit spending in Iraq has absorbed a lot of saving that could otherwise be put to work in the stock market. One can blame a bad outcome of the War in Iraq squarely on George W, but the poor stock returns under his administration were almost completely beyond his control. Current Outlook Both the dividend and capital gains tax cuts are due to expire in 2008. The Republicans, despite controlling both Houses, have so far not been able to extend these cuts, not to speak of making them permanent as Bush has repeatedly sought. The Democrats, who are feeling increasingly good about their prospects in November, never liked these Bush tax cuts and are anxious to block them. This is where politics can really matter. If the Democrats do wrest political control from the Republicans, the extension of these stock-friendly tax cuts in their current form would become highly uncertain. This will be most unfortunate since the dividend tax relief offsets the double taxation of corporate income and eases the burden on retiring boomers who are looking to their portfolio to fund their retirement. Nevertheless, tax policy is only one element that impacts the stock market. Economic growth, interest rates, and world trade and capital flows will ultimately be more important in determining the market's direction. Ultimately the party that does the right thing for America will be rewarded by good stock returns, whether this is under the Republicans or Democrats. And the Democrats must recognize that stocks are held by millions of Democrats as well as Republicans and keeping the market healthy is a high priority. Perhaps that is why stocks are ignoring the Bush polls.