Why An Obama Victory Does Not Foretell Economic & Market Gloom

I rarely blog about politics here, but it is very difficult to get the full truth (from either party) during a presidential campaign. Since I started this blog in 2004 I have commented once each election cycle on a certain lie that always makes the rounds before we head to the polls. Most of you have probably heard from partisan people that an Obama victory tonight would kill the economy and the stock market. After all, isn’t it true that Democratic administrations are known for taxing and spending, which wrecks our country’s economy?

One of my favorite quotes goes like this, “Numbers don’t lie, people do.” It fits perfectly here, as the numbers provided below will show. The truth is, most meaningful economic statistics (GDP growth, unemployment rate, inflation rate, growth in federal spending, budget deficit level, to name some of the big ones) have historically been stronger under Democratic presidents than Republican ones. You can refer to my October 2004 post entitled “Do Elections Affect the Stock Market?” for the detailed statistics.

As goes the economy, so goes the stock market. This is not only a recent trend (8 years under Clinton, market up 203%, 8 years under Bush, market down 28%). According to Ibbotson Associates (a market research firm), inflation-adjusted stock market returns have been 100% higher under Democrats since 1926:

I point this out not to insist that an Obama presidency assures the market will be strong, but simply so investors know the truth, in case they are partly basing their vote for president on economic data. It is important to note the common statistical mantra “correlation does not equal causation.” These numbers do not mean that a Democratic president causes the market to go up twice as much as a Republican president (it could be any number of factors, or a combination of them). What it does mean, however, is that the common contention that the economy and stock prices do better under Republicans is actually completely backwards.

Regardless of historical statistics and putting your political allegiances aside, remember one thing. It’s your right to vote, so be sure to go to the polls today if you haven’t voted already.

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3 Thoughts on “Why An Obama Victory Does Not Foretell Economic & Market Gloom

  1. Anonymous on November 4, 2008 at 12:57 PM said:

    I submit that this historical outperformance probably comes from the phenomenon whereby Democratic candidates are voted in during times of economic turmoil, when stocks have probably been doing poorly amid weak economic conditions (and when people are looking for more help from the government). Thus, Democrats have generally had more of a tailwind in terms of lower beginning-of-term valuations, which bias these statistics upward.

    Look at who is elected today. It is likely to be Obama, but McCain would face the same tailwind from starting valuations. With stocks at their current valuation levels, it is almost a no brainer that they will experience above-average performance from here. Unless the country collapses into chaos, that is…

  2. Anonymous on November 4, 2008 at 1:46 PM said:

    That’d take a pretty serious multivar regression with lagged variables etc. to statistically prove. Off the cuff and without any substantiating evidence, I agree with you though Anon.

  3. I just love this blog and it’s for articles like this one that I do.

    While at 3/4 of it I was surprised Chad might be taking a stand for Democrats today and especially by such airy arguments…and then it all fell in place.

    Make it big letters, Chad…most of the people I know make little to no difference between correlation and causation!

    Stronger economy during democratic rule does NOT mean better economy handling by democrats.

    Lower crime levels do not neccessarily mean better police.

    And – they might kill me for that – withdrawing from Iraq is not neccessarily going to work out better for the peaceful Americans (as they claim and as Obama promises them).

    We all make [incorrect] assumptions sometimes, but God some people live by assumptions and not only that they BELIEVE they are right!

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