Politics & Investing: Which Party is Better For Your Portfolio?

Which political party is better for your investments, Republican or Democrat? With the 2008 presidential campaign in full bore, perhaps we can get some insights into the future by examining a few administrations from the past.

Republicans: Reaganomics

The nation was struggling when Republican Ronald Reagan took office in 1981. Inflation had soared to 14 percent, nearly one out of every 10 workers was unemployed, and Americans were adding a new word to their vocabularies: stagflation, the marriage of high inflation and unemployment with slow growth.

Reagan acted boldly to reverse the nation's economic malaise:

* Whittling the tax system down to two marginal rates of 28 percent and 15 percent,
* Launching a massive military buildup that both buoyed the economy and our image abroad,
* Championing free trade with Canada; opposing big unions; creating Individual Retirement Accounts (IRAs) and 401(k)s, slashing social spending and reasserting the United States on the world stage.

When Reagan left office, inflation had retreated to 4.1 percent, unemployment had fallen to 5.2 percent, 20 million more jobs had been created and the stock market was on a tear. During his two terms, the S&P 500 Index1 averaged an annual 14.4 percent, between four and five percent higher than its historic norm.

Democrats: "It's the Economy, Stupid"

In 1992, Arkansas Democrat Bill Clinton believed that the election hinged on domestic economic issues. He had much to run on:

* Unemployment had crept up to 7.3 percent.
* Median income had fallen from about $40,000 to less than $38,000.
* The federal deficit had ballooned to $290 billion.

After his upset win, Clinton benefited from four key events during his two terms that buoyed the stock market:

1. The end of the Cold War enabled Clinton to reduce military spending and help turn a federal deficit into a surplus.2
2. U.S. productivity growth accelerated.3
3. The World Wide Web (1991) and the Internet browser (1993) were created, helping to rapidly commercialize the Internet.
4. The 1994 mid-term election produced a fiscally conservative Congress, causing Clinton to assert in his 1996 State of the Union Address, "The era of big government is over."

The stock market soared. The average annual return of the S&P 500 Index during Clinton's two terms was a remarkable 17.4 percent.

Both Sides Now

The stock market returns that buoyed the Clinton Administration peaked in March 2000, 10 months before George W. Bush became the nation's 44th president.

Domestic terrorism, international turmoil and soaring energy prices-arguably areas beyond the reach of any president-conspired to help create an economic morass for the new Administration. One area presidents do have considerable sway over, however, is taxation, and tax reform quickly became a lynchpin of the Bush economic platform.

Bush enacted three bold tax cuts. The first, in mid-2001, pumped some $40 billion back into the economy. A second tax cut in March 2002 and a third in May 2003 reduced tax rates on income, capital gains and dividends. Growth, low interest rates, international trade and money flows also seemed to move in the right direction during the second two years of Bush's first term:

* The economy grew at 4.3 percent in 2003.
* The stock market recouped its earlier losses.
* Unemployment declined as job growth picked up.

During his first two years, the S&P 500 Index averaged a negative 17.15 percent per year, while during the second two years of his first term the index averaged 19.45 percent annually.

Looking Ahead to Election Day

History tells us that economies can do well, or poorly, under either political party. So what should you do on Election Day 2008? By all means, vote. Vote for the person you think will best represent your traditions, values and aspirations. But as for your finances, follow basic rules that have stood the test of time:

* Don't react to short-term market fluctuations. Invest for the long term
* Diversify your investments to include small-, medium- and large-company equities as well as international and fixed-income holdings
* Fund retirement accounts to the maximum you can afford. As for non-retirement goals, add money regularly (monthly, semi-annually)
* Review your progress annually with your investment representative.

Just as history tells us that investments can do well or poorly under either political party, history also illustrates that equity markets move higher over time. Not in a straight line or without pauses and setbacks. But after every pause or setback, the markets have recouped and gone on to new highs—regardless of who has occupied the White House.

Politics and Investing