2018 turned out to be a down year for stocks. When the exchanges closed this afternoon, the Dow industrials were negative since last December’s final trading day, by about 6%. It’s the first down year since 2015, the only other down year since the Great Recession’s 2008.
2008 was also the last full year, prior to 2018, in which we had a Republican president. For the eight years in which Democrat Barack Obama was president, 2009-2016, the stock market was up every single year, save for 2015’s slide of all of 2%.
“The Ford years. What to make of them/him?” (Updike) AP Photo; photocredit: ASSOCIATED PRESS
These facts reinforce the oft-made observation that stocks do better during Democratic than Republican administrations. This is generally true enough. From Harding to Hoover in the 1920s and early 1930s, stocks finished down, thanks to a Dow hunkering in the 40s in 1932. Under FDR and Truman, they went up by multiples from a low base, did fine under Eisenhower in the 1950s, and broke 1000 under Kennedy/Johnson. Nixon could not hold that all-time high, and Ford presided over a bear market. Carter held water, Reagan did great, Bush well, and Clinton very well indeed. W. was a net loss, and Obama a major winner. Now Donald Trump has a blemish that his predecessor barely had, a negative year in the Dow.
The standard explanation for this basic correlation—Democratic president good, Republican one less so for stocks—is that stocks perceive that free-market policy is not as sound, economically, as some healthy level of government management of the economy. Republicans represent the free-market concept, and the mass of stock purchasers knows that this is kind of crazy. Democrats represent enlightened regulation of the economy, and the mass of purchasers sees this as the better part of wisdom.
This analysis is flawed. The timing is off. If it were true, the data would be the reverse. Stocks would go up in Republican times, down in Democratic ones. The reason is that stock prices are reflections on the crowd’s estimations about the future.
The intraday January 1966 breaching of the 1000 level in the Dow for the first time is instructive. A few weeks before, it was 1965, the year the departed President Kennedy’s big tax-rate cut was fully phased in. A prominent part of Kennedy’s rationale for that tax cut was that it would encourage demand for American money, stifling any reason for the United States to alter the current gold definition of the dollar. The aura of the late JFK was still there two years and two months after the assassination. JFK’s policy mix still prevailed when stocks first hit that mythical 1000.
More precisely, it was the very end, the last moment that that policy mix existed as the official orientation, the status quo, the governing assumption. The mentalité of tax-rate cuts and a gold dollar held together care of Kennedy, and it began its first perceptible stages of fading and breaking up in early 1966. As it came into focus that Lyndon Johnson was no JFK—guns and butter, an income tax surcharge, winding down the gold standard—the Dow did not hold 1000. Indeed, it did not clear that level for good for 16 years, until 1982.