Presidential History

With the presidential election looming,it might seem that your stocks will bebetter off if President Bush wins inNovember. After all, with a Republican ledCongress, Bush has reduced taxes oncapital gains, dividends, and high salaries.However, presidential history points tothe contrary. According to a study byUniversity of California Los Angelesfinance professors Pedro Santa-Clara andRossen Valkanov, since 1927, stockholdersaveraged general returns of 5% to18% a year more for small cap stockswith a Democratic president, while bondsperformed better during a Republicanpresidency. The study further found thata Republican win gives a quick boost tothe market as investors anticipate that aRepublican will be good for the market.

However, for the duration of a presidency,a Democratic White House hasperformed better. Harvard political economistAlberto Alesina believes that partof the reason is that inflation has beenhigher under Democrats, and whenRepublicans took over the presidency,they were compelled to control inflation,which stimulates a short-term recession.Research has also shown that the stockmarket has performed best in the secondhalf of a presidency, especially in a president'sthird term. Last year followed thistrend, and if presidential history is anyindication, the political push this yearmakes strong stock returns likely.