Pop Quiz On the Markets: Which Is Better, GOP or Dem's?

By: Mark Hulbert

Pencils ready? Here's a pop quiz on how the stock market is affected by the political party that is in power.

Q. True or false: The stock market performs better when the President is a Republican.

A. False. Since 1901, the Dow Jones Industrial Average's average annual gain, after inflation, has been nearly twice as high when a Democrat has occupied the White House.

Q. True or false: During Republican Presidencies, the stock market has performed better when Congress also has been controlled by Republicans.

A. False again. On average during the 28 years since 1901 in which a Republican has been President and Democrats have controlled Congress, the DJIA has produced a 2.2% real return (before dividends). On average during the 25.8 years in which the Republican party has controlled both branches of government, in contrast, the Dow has produced an inflation-adjusted return of just 1.2%.

If you are like most investors, you failed both questions. The prevailing wisdom going into last Tuesday's election was that investors prefer a Republican Presidency and a Republican-controlled Congress. And as is so often the case with the conventional wisdom, it was wrong.

I owe this insight to Allen Harris, editor of the Fidelity Navigator and No-Load Navigator newsletters. Harris was not at all surprised by the stock market's weakness late last week and on Monday of this week. That weakness in fact is right in line with the historical record.

Harris based his analysis on data from Ned Davis Research, the well-regarded institutional research firm based in Atlanta. (Newsletter industry factoid: For a few months in the early 1980's, Davis himself published a newsletter for individual investors titled Ned Davis Traders Hotline.)

Conventional wisdom also holds that Republicans are much better than Democrats at keeping inflation in check. And Davis' research reveals that at least in this respect it is correct: Inflation tends to be much lower when Republicans control both branches of government than when the Democrats are in power.

In fact, the CPI on average actually has been negative during the 25.8 years since 1901 when a Republican has been in the White House and the Republican party has controlled Congress.

This contrasts with an average CPI of 4.8% during when the Democratic Party controls both branches of government.

This aspect of Davis' research sheds a fascinating light on the current debate over inflation. At least from a historical perspective, last week's election increases the odds in favor of deflation.