Politics & Policy

Of Stocks & Presidents

Historically, the Dow has strongly favored pro-growth policies.

An undeniable reality of this election season has been the positive correlation between George W. Bush’s reelection hopes and stock market returns. Be it strong polling data, jumps in Bush “futures” on Tradesports.com, or good employment numbers, stocks have mostly moved with Bush’s election chances: up when he’s up, down when he’s down.

The Democrats have responded to market fear of John Kerry with statistics showing the Dow Jones Industrial Average has in fact performed better under Democratic presidents over the last 100 years. While the facts about historical Dow performance do favor the Democrats, the party’s and John Kerry’s inability to understand why helps to explain why stocks have fallen when Senator Kerry’s election hopes have risen.

Economist Arthur Laffer often points out that increased taxation, regulation, protectionism, and inflation are inimical to economic growth and stock market returns. Importantly, history is on Laffer’s side.

Stocks plummeted under Republican Herbert Hoover not for being too expensive, but because among other things, Hoover signed the protectionist Smoot-Hawley tariff bill, while raising the top tax rate from 25 percent to 64 percent. The Dow understandably fell 70.8 percent during his presidency.

Democrat FDR was no better. Indeed, until the 2000-02 bear market, stocks had only fallen three years in a row twice — under Hoover and Roosevelt. The latter continued Hoover’s redistributionist tax policies, devalued the dollar (an ounce of gold was revalued from $20.67 to $35), and, in creating the welfare state, saddled the U.S. with government programs that legislators are still trying to fix today.

Moving forward to the Kennedy years, the lessons of JFK’s presidency have seemingly been ignored by John Kerry. Seeking to expand the economy and government revenues, John F. Kennedy cut the top tax rate from 90 percent to 71 percent. While high by today’s terms, stocks still responded positively to the direction of tax rates — the Dow rallied nearly 60 percent.

LBJ benefited from the Kennedy rally until 1966 when the Dow hit 1,000 for the first time. At this point the markets started to price in the fact that excessive foreign and domestic spending would make maintaining the dollar’s gold link impossible. The Dow did not rise above 1,000 for good again until late 1982.

In economic terms, the Nixon years could charitably be called disastrous. From tax surcharges to dollar devaluation to price controls to new regulatory agencies like the EPA, Nixon failed on nearly all the benchmarks cited by Laffer. Unsurprisingly, the Dow fell over 15 percent during the Nixon years, and dropped far more in inflation-adjusted terms. The presidencies of Gerald Ford and Jimmy Carter saw more of the same in terms of taxation, regulation, and inflation. Unsurprisingly, stocks continued to reside in bear-market territory.

Having inherited a nearly collapsing economy, Ronald Reagan cut taxes and decreased regulation. In doing so he halted and ultimately reversed the dollar’s inflationary slide. From a 1982 low of 784, the Dow took off, rising all the way to 2,600 by the end of the decade. While not the ideal president from a free-market perspective, George H.W. Bush’s policies resembled that of his predecessor enough that the Dow rose 46 percent during his term.

As for President Clinton, stocks did rally while he was in office, but in policy terms, it’s best to separate his presidency into two time sequences: before 1994 and after. Upon taking over, Clinton pushed through higher taxes, but at 39.6 percent, the top rate remained the third lowest levy on top earners since the 1920s. Still, the markets responded to the Clinton hikes by slowing down, rising only 20 percent from when he entered office to when the Republicans took over Congress in 1994.

The above distinction is useful in that post-1994, the Republican-controlled Congress forced on Clinton welfare reform, NAFTA, and the 1997 cut in the capital-gains tax rate from 28 percent to 20 percent. Aided by Wayne Angell and Manley Johnson, Alan Greenspan’s Federal Reserve maintained impressive dollar stability. Stocks responded positively, with the Dow rising 173 percent from 1994 until Clinton left office.

Returning to John Kerry vs. George W. Bush, Kerry has promised to raise taxes on the “rich,” has proposed greater environmental regulations (among others), and in bashing “Benedict Arnold CEOs,” has made it apparent that he will not be a free trader along the lines of Bill Clinton. Importantly, inflation is a factor in his trade commentary in that the markets often interpret presidential rumblings about “fair trade” as an implicit signal that the dollar needs to weaken further.

On the other hand, President Bush has promised to make permanent the pro-growth 2003 tax cuts, has proposed expanded free-trade zones, and in advocating health savings and private Social Security accounts, is signaling to the markets that he’ll deal with the unfunded liabilities that will in the future bankrupt the U.S., all the while bringing about massive inflation.

Comparing the policies of Kerry and Bush, it’s no surprise why the markets rally on good news for the latter. Until the Democrats accept the fact that policy matters, and in doing so, learn from the past, it can be expected that stocks will fall in response to Democratic success in the political arena.

John Tamny is a writer in Washington, D.C. He can be contacted at jtamny@yahoo.com.


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