It's an open question which party's policies are better for the economy, but the stock market does much better under Democratic presidents.
On Tuesday, the Dow Jones Industrials Average topped 13,000 for the first time since March 2008. That set off a predictable round of crowing from liberals and sniping from conservatives. Those on the right griped that President Obama, having villainized the financial industry, would now attempt to make political capital from the market's improvement.
That complaint is silly. Whether Obama has "villainized" the sector is both subjective and, in this case, mostly irrelevant: only three members of the Dow's 30-stock index are financials: Bank of America, JPMorgan, and American Express, and the broader market, which it tracks, also consists of more non-bank stocks than bank stocks (obviously).
Who gets credit for what is an important question. As Ezra Klein has pointed out, we're likely to see an improving economy between now and 2016, so whoever is elected in November will preside over a relative boom, and he and his party's policies will receive credit for it, which could have long-lasting effects (see the Democratic Party's dominance in the post-FDR years). But the stock market doesn't really tell us much, since it measures the extent to which equities are gaining in value, not how much the economy is improving.
Even if stocks doesn't prove anything about the wider economy, they show a remarkably strong correlation with the policies of the two parties, even if the causative relationship is unproved. As this excellent Bloomberg Government chart, rescued from behind the paywall by Joshua Green, shows, $1,000 invested in a fund tracking the S&P 500 (an index similar to the Dow) would have grown far more under Democratic administrations than Republican ones going back as far as John F. Kennedy (the assumption is that the money would be pulled out when the other party was in power). It's important to note that two biggest jumps came under Bill Clinton and Barack Obama, both of whom entered office amid recessions, giving the market little direction to go but up.
So do you want the economy to improve? It's an open question which party would achieve that better. But if your only imperative is an increasing portfolio, the choice is clear. Maybe those Wall Street donors flocking to Mitt Romney should reconsider where their investment will have the best return.
Image: Bloomberg Government
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