Another Study - Republicans Bad for the Stock Market

Professors Santa-Clara and Valkanov look at the excess market return - the difference between a broad index of stock prices (similar to the Standard & Poor's 500-stock index) and the three-month Treasury bill rate - between 1927 and 1998. The excess return measures how attractive stock investments are compared with completely safe investments like short-term T-bills.

Using this measure, they find that during those 72 years the stock market returned about 11 percent more a year under Democratic presidents and 2 percent more under Republicans - a striking difference.

One interesting finding is that although both large and small companies do better under Democratic administrations, small companies do especially well, while larger ones do only a little better. The return on the smallest 10 percent of traded companies is 21 percent higher during Democratic administrations, while the return on the largest 10 percent is only 7.7 percent greater.

Democrats - better for workers, better for the stock market, better for small business.

For at least 72 years, the stock market did far better under Democratic presidents than under Republicans. How can it be that investors have failed to take advantage of this seemingly predictable pattern?

Professors Santa-Clara and Valkanov wrote the first draft of their paper in 1999, and they admit that they could have profited handsomely by selling stocks after the 2000 election. Alas, like most investors, they didn't sell at the most opportune time. Even finance professors sometimes misjudge the market.