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    Friday, October 31, 2008

    Investing and the GOP vs. Dems

    A (liberal) co-worker forwarded this analysis from the NY Times to me - ostensibly to show how the Democrats are better for investors.I thought about it and wondered what the Times might be tying to prove.

    So, I figured, if you were studying such trends, why would you choose the S&P Index, and not the Dow? The Dow would seem obvious. It's an old, established index and something all people relate to. Why the S&P? Could it be because, for some reason, the S&P doesn't tell the same story as the Dow?

    I decided to pull the historical data for the Dow and do the same analysis, using the Dow. Also, for fun, I decided to add the Coolidge administration. I mean, if we're going to lambast Hoover, let's at least give Coolidge his due. In doing so, I wonder if you'll notice a strange correlation between the Coolidge/Hoover numbers and the Clinton/Bush2 years.

    It's kind of interesting the crash after a long, big orgy.Anyway, I used yesterday's (Oct 30) close for Bush 2. And, to make the analysis easier, I chose to average the percentage increase or decrease across the president's time in office (imperfect, but good enough for comparison purposes):

    Bush 2 = -1.91% per year (what a difference a couple of weeks make in this market, by January, he could be a net positive (though I don't expect that).
    Bush 1 = +11.26% per year
    Reagan = +16.9% per year
    Nixon/Ford = +2.98% per year (figured Ford's admin was too short)
    Ike = +15% per year
    Hoover = -20.75% per year
    Coolidge = +42.6% per year

    Clinton = +28.39% per year
    Carter = -.3% per year
    Johnson = +5.15% per year
    JFK = +6.1% per year (broke up LBJ and JFK because I wanted to see if there was any early or later effect from the JFK tax cuts)
    Truman = +10.2% per year
    FDR = +16.2% per year

    Without Hoover and Coolidge, the average per year increase for Republican administrations is 8.34% per year. For Democrat administrations, it is 10.94% per year. If we include both Hoover and Coolidge in the GOP numbers, it goes up to 9.08% per year. There's a difference, sure, but, not as much as the S&P analysis indicated, and right around 9-10% which is pretty much
    what we're conditioned to expect from stocks, irrespective of who is president. For fun, remove Clinton, and the D average is 7.47%.

    Some things jump out at me from this analysis:
    1. The Coolidge and Clinton years were the absolute best for stocks. Both these periods were marked by tremendous innovation and speculation, and both were followed by down periods.
    2. The New Deal years are interesting. In March 1937, stocks peaked at 194, from their starting point for FDR of 53.84. From July 1937, they tumbled downward, bottoming at 92 in April 1942 - a 50% decline in 5 years! Imagine if W had the same performance (he's down 13% in 8 years). But FDR was a wartime president (oops, same for W). They didn't start a steady climb upward until that summer, after the tide had turned in the Pacific War, and the American war machine kicked in. Without WW2, that FDR 16.2% does not happen. In fact, many consider it was only the threat of War that ensured FDR's 1940 victory and 3rd term. The New Deal programs weren't proving so capable of turning the economy around, but a World War was.
    3. Clinton's numbers are amazingly good. However, having just lived through the '90's I think we can agree a lot of the wealth and stock market run up was not entirely real. Plus, Clinton, unlike the current Democrat nominee,was a proponent of free trade and cut the capital gains tax. Those two policies alone probably had more impact on investment than any other factors during his 8 years. I give at least half the credit for Clinton's success to Newt Gingrich. In fact, I wonder what this analysis would show us if we did it based on Congressional control????
    4. I'm really surprised by the mediocrity of the other D's numbers. I wonder what JFK's would have been had he remained president. He passed the supply-side tax cut that was Reagan's model, and I wonder if his New Society would have been very much different from LBJ's.
    5. The analysis you sent showed Carter as a success, economically. This analysis confirms his ineptitude, as well as that of Nixon and Ford (and of the '70's in general)
    6. Most of all, I think these number show the economy to be much more cyclical. They also show that the controls put into place during/after the Depression, are working, and have worked, to ease the business cycle and provide a softer landing. I think better understanding and application of monetary policy has helped, too. Lots of Libertarians like to rail at the Federal Reserve, but I think they're largely wrong.

    I did check one other thing I had been led to believe, and that was that you could take any 20 year period and stocks would outperform social security (when you use the historical growth rate of SS as 2%). That's true if you qualify the years as after the depression, or, you forswear investing from about 1927-1931. I don't always get to fact check these kinds of things, but just thought this was interesting. The bottom line, to me, is really that the stock market is immune to presidential meddling, which I had been taught in economics class, but, I think it's pretty much true, and a testimony to the solidity of our system. And, it's also a reason why investing part of our social security money in the market is not a bad thing - as long as we avoid another Depression.



    Navy Blue Cougar said...

    As far as the idea of putting some of the social security trust fund into the stock market, I generally like this idea, with a few reservations.

    My first reservation is that I don't want to see a few firms or banks controlling all of the social security funds that are invested. I would like to see it spread around to mitigate risk.

    My second reservation is the disproportionately large share of the market that a chunk of the social security trust fund could command. In this case, government investing could actually influence stock prices directly and I don't feel very comfortable with that. The amount of money in the social security trust fund could definitely be the 800 pound gorilla in the market.

    I think the money that is currently in the trust fund will have to be left alone. Touching that money right now would spark outrage among people that are counting on social security. I would be in favor of starting to divert some of the dollars that are going into the trust fund into some sort of an index fund that is well balanced between sectors and companies, so as not to unduly influence stock prices, to provide strength to the market in general, and to minimize risk.

    At most times, the stock market will provide a greater return than securities, and at those times, then it would be appropriate to sell stocks if needed to cover social security shortfalls.

    I think we would have to have a significant amount in securities to prevent the need to "sell low" during economic downturns. If necessary, these could be sold instead of stocks to cover a social security shortfall, until the market turns around.

    A good balance of securities and stocks could greatly improve the long term solvency of the social security system. Social security is too important to too many people to make a rapid fundamental change. In my opinion, it would need to be incrementally phased in.

    If properly implemented, with an eye on the long term, it could eventually relieve the concerns for long term solvency of the social security system. Eventually, if returns on the portion invested in stocks do well enough, we could even see some relief in payroll taxes.

    Jay said...

    NBC - appreciate your comments and glad you're open to the idea. The only thing is, the "trust fund" is a fallacy, an accounting sleight of hand. There is no trust fund. The money in the "trust fund" or that old "lockbox" Al Gore used to talk about, has been spent, loaned to the federal government to meet other obligations. What's left for the trust fund is nothing but a bunch of IOU's, worthless for investment purposes.

    No, what I want to see, is the individual be allowed to invest say 2% of the employee portion, and 2% of the employer portion (that's really the employee's money, too, but I'll play along with the illusion) in stocks, bonds, funds. I think the federal government has a 401(K) or similar plan. While we're extending the FEHBP to everyone, why not add their thrift savings plan as well.

    This could be phased in for younger workers, and made optional, perhaps for those, such as myself, who are older and may not want to risk any money in investments,

    History definitely shows us that investors who spend 25-40 years investing in the market, do pretty well and outpace the meager "earnings" of SS.

    Anyway, thanks for your thoughts. Something needs to be done.