Taking an Election Day Spin
All the pundits do it. We can do it, too. Let's analyze this election taking place today in terms of what it means for investors. Investors fare better under Democratic administrations. Investors fare better under Republican administrations. Investors fare better when they make informed decisions and vote.
By Ethan Haskel (TMF Cormend)
November 7, 2000
This has been a campaign of numbers and promises and projections. It's said that people always vote their pocketbooks, so let's see what the numbers and our pocketbooks would say about today's election. Bear with me as I pretend to be a policy wonk.
Spin Number 1:
Foolish Four investors who think that the outcome of today's close presidential campaign won't affect them should think again. There's new data showing the performance of the Foolish Four (FF) strategy is correlated with politics more closely than some may have guessed. In fact, FF investors will do better if George W. Bush is elected today.
I've gone back to 1961, the earliest year for which Foolish Four data is available, and correlated the annual returns with the political party that was in power in the White House each year. Here are the results for portfolios started in January:
Average Return
Dow ��� Fool 4
Democrat ������13.8% ���17.8%
Republican ����13.7% ���24.1%
Although there's virtually no difference in how the Dow performed under the administrations of the two major political parties, the Foolish Four clearly performs much better during Republican administrations. Over the past 39 years, the Foolish Four has outperformed by 6.3 percentage points a year during Republican administrations. And that doesn't even include this year, where the FF is losing 9.0% to date, again under a Democratic administration.
Under Republican administrations, the Foolish Four has outperformed the S&P 500 Index 85% of the time (17 of 20 years). But under the Democrats, the Foolish Four has outperformed only 63% of the time (12 of 19 years, excluding this year).
Foolish Four investors who know what's good for them will get to the polls today and vote for Mr. Bush. Your pocketbook will thank you.
Spin Number 2:
Would you like to have an extra $18,000 in your bank account eight years from now? A vote for Al Gore today could mean just that for you and your family. Did you know that, since 1961, the stock market -- as measured by the S&P 500 Index -- has performed much better under Democratic administrations?
Here are the numbers:
Average Return ��
S&P 500
Democrat 15.8%
Republican 12.1%
Under the Democrats, the stocks of the S&P 500 have gained 3.7 percentage points more a year on average compared with Republican administrations. That's 30% more per year, and those gains add up. Consider an average middle-class family that starts with $20,000 in stock investments and adds $2,000 a year. After eight years of a Gore administration using those average returns above, this family would have about $93,000 in their account. But with a lower average return during a Republican administration, they'd have only about $75,000 -- $18,000 less.
Investors who know what's good for them will get to the polls today and vote for Mr. Gore. Your pocketbook will thank you.
Spin Number 3, the Foolish Take:
I've just reviewed historic stock return data, trying to assess if there are any differences in the markets between Democratic and Republican administrations.
Here are the results, using January start dates:
Average Return
����Dow ����S&P 500 ��Fool 4
Democrat � 13.8%� �15.8% 17.8%
Republican �13.7% �12.1% ��24.1%
Standard Deviation
����Dow ����S&P 500 ��Fool 4
Democrat � 13.7% � 14.4% � �14.4%
Republican 17.4% �� 17.0% �� 22.5%
There seems to be a trend for the Foolish Four to perform better during Republican administrations than under the Democrats, despite the observation that the S&P 500 has performed slightly better under the Democrats. The Dow returns were virtually identical under the two administrations
But a closer look at the numbers shows that the standard deviation for the average returns are quite high. For those not familiar with the concept of standard deviation, here's a succinct summary:
The standard deviation is a statistic that tells you how tightly all the various examples are clustered around the mean [average] in a set of data. When the examples are pretty tightly bunched together and the bell-shaped curve is steep, the standard deviation is small. When the examples are spread apart and the bell curve is relatively flat... you have a relatively large standard deviation.
The large standard deviations in the data I've shown above indicate tremendous year-to-year variations in returns for the Dow, the S&P 500, and the Foolish Four. Because of these large variations and relatively few data points, the apparent differences between the two political parties may well be simply the result of chance.
In fact, if we perform statistical analysis, using a T-test, none of the differences in stock returns between the two political groups is statistically significant. That's not to say that true differences might not exist. It just might be very difficult to prove such differences are real, given the limitations in the data set.
How often does that bit of analysis get included in your nightly news?
One data set. Three different spins on the data. Three different conclusions. And this kind of confusion is nothing to the way the numbers have been thrown around by politicians over the last few months. As we've discussed, sorting out such claims can be difficult. But that doesn't mean we should throw our hands up and ignore the process altogether.
Whether investing or choosing who will lead our country over the next four years, we often have to make difficult decisions with limited or incomplete data. Voting is an inexact science at best, but being armed with the tools to sort out such claims only can help build a better democracy. Consider what the stock market has been like in countries where they haven't had free and meaningful elections.
Fools everywhere who know what's good for them will get to the polls today and vote. Your country will thank you.
Puzzler answer. Two weeks ago, we left you with a puzzler -- What do Xerox <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %>, PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>, Enron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENE)") else Response.Write("(NYSE: ENE)") end if %>, Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %>, and Minnesota Mining and Manufacturing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> have in common? Their ticker symbols are palindromes, reading the same backward and forward, of course!
Beating the S&P year-to-date returns
(as of 11-06-00):
Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> ����������+20.5%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> �����������+35.9%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> �������-5.5%*
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> ����+4.7%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> ��������+23.2%
Beating the S&P ���������������+15.8%
Standard & Poor's 500 Index ����-2.5%
*Includes Visteon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VC)") else Response.Write("(NYSE: VC)") end if %> spin-off
Compound Annual Growth Rate from 1-2-87:
Beating the S&P ����������� ���+23.9%
S&P 500 ����������������� �����+16.6%
$10,000 invested on 1-2-87 now equals:
Beating the S&P ������������$194,400
S&P 500 ���������������������$83,400
