Vote for Gridlock

By Daniel Kadlec

The relationship between politics and the stock market is overvalued. Peace, low mortgage rates, affordable gas and, yes, Alan Greenspan are way more important to investors than which party is in power. Yet every four years, after the Dems and the G.O.P. stake out the policy battleground at their national conventions, wags start in on how the market would fare under each candidate. Fun sport. But the Clinton years in particular stand much received wisdom on its head.

Republicans are supposed to be the probusiness party. Yet since 1913 the Dow, excluding dividends, has risen an average of 7.4% annually under Democratic Presidents and only 4.7% under Republican ones, according to Ned Davis Research. Republican Administrations have presided over better gains when you strip out the effects of inflation. But not much better, and by that standard the Clinton years have been bountiful. In his seven full years, the Dow rose an average of 19.5% annually, while inflation averaged 2.5%, giving investors an astounding "real" return of 17% a year. The long-run average, no matter who's President, is just 5.6%.

Democratic Presidents, who tend to favor liberal spending packages, are supposed to be better for small stocks than large ones. But under Clinton, small stocks rose 16.2% a year, vs. 19.4% for large stocks, reports Ibbotson Associates. Among the best-performing big stocks--go figure--were drug companies, damn the early specter of HillaryCare and the current threat of price controls.

It's naive, of course, to credit or blame any President for how the stock market moves during his tenure since so much is beyond his control. Can Clinton really claim responsibility for the Internet? Rightly or wrongly, though, Americans ascribe their fortunes to the party in the White House even if the times more accurately reflect initiatives flowing from a hostile Congress--or at least the gridlock that a hostile Congress sustains.

Gridlock, in fact, is one candidate investors should vote for. The Dow has fared best when one party has controlled the White House and the other has controlled Congress, the optimum formula being a Democratic President and a Republican-controlled Congress. That combo has produced Dow gains, excluding dividends, of 10.7% a year. The hands-down loser: Republicans with a mandate. When the g.o.p. has run both branches, the Dow has limped at less than 1% a year.

If you're desperate for an election play, consider defense stocks. Bush would reinvigorate military spending. Even Gore would be likely to throw more resources that way. Energy might benefit under oilman Bush, as might Big Tobacco and Microsoft, both of which are suffering under federal litigation. Financial stocks might do well under Bush's plan to partly privatize Social Security. Under Gore, waste-cleanup companies might do well, as might Microsoft's competitors.

But the big economic issue--whether to cut taxes (Bush) or retire debt (Gore)--amounts to an embarrassment of riches. Either would be good for the market, and that's no accident. Nearly half of all households now own stock, a record count. Both Bush and Gore, like the rest of us, are keeping a watchful eye on the Dow.

See time.com/personal for more on market politics. E-mail Dan at [email protected] See him Tues. on CNNfn at 12:20 p.m. E.T.