The Buckingham Report

No matter whether you are a donkey, elephant or something in between, I think many folks would say that the best thing about the conclusion to the mid-term elections will be the end of the mud-slinging, at least until the next campaign. While I learned long ago to avoid taking sides publicly in the political debate, I do hope that most voters go to the polls to actually vote for their candidate, rather than against his or her opponent.

Alas, the closeness of many of the Congressional races means that the airwaves have been filled with lots of political ads, 31% more than the same period in the 2002 midterm election, according to Nielsen Media Research. And as CEO of ad-tracking firm TNS Media Intelligence/CMAG Evan Tracey said, "Some ads this season almost cross the line of polite dinner conversation."

Maybe things only seem nastier today. The Wall Street Journal recently featured comments from Stephen Hess, a scholar of governance and public policy, and author of The Little Book of Campaign Etiquette. Mr. Hess said, "The loathing of Thomas Jefferson was palpable in his era. If you go back long enough in American history, there has always been so much anger and so much ill-will cast around that you have to be careful about thinking that we invented it."

For many election watchers, who wins which hotly-contested Congressional race takes on less importance than whether the Democrats gain control of the House of Representatives and/or the Senate. And, as of yesterday, data from the Cook Political Report suggested that with all 435 seats in the House up for election, Democrats were thought to be safely ahead in 184 races with Republicans leading in 165. Of the 86 remaining seats, 24 were leaning or likely to go to a Democratic candidate, 27 were leaning or likely to go to a Republican candidate and 35 were viewed as a toss-up.

In the Senate, of the 33 seats up for election, 16 were safely, likely or leaning Democratic, 8 were safely, likely or leaning Republican and 9 were considered to be a toss-up. Of those 67 seats not up for election, 40 are presently held by a Republican and 27 are held by a Democrat.

The numbers above would seem to indicate that control of the House is likely to shift to the Democrats, while the Senate is likely to remain in Republican hands, though obviously anything can happen on Election Day. In fact, one poll I looked at this morning has the Senate divide ending up 51 Democrats and 49 Republicans.

While my view of the political landscape might be of interest to a few, the real issue of the moment for Buckingham Report readers is what the election might mean for the stock market. Lots of market pundits have attempted to predict which sectors may rise or fall in the short-term based on their readings of political tea leaves, but a review of the historical evidence offers much more interesting perspective for those of us with a long-term investment time horizon.

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As the table above vividly illustrates, equities have historically delivered solid returns no matter which party is in control of Congress. What may come as a surprise to many, however, is that stocks have actually performed better, generally speaking, when Democrats have the majority in the House and/or the Senate. The reasons for this are a topic for another day, but it is also very apparent that small-cap stocks really seem to thrive when Republicans are in the minority on Capitol Hill.

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Further, contrary to what conventional wisdom might suggest, both large- and small-cap stocks also outperform when a Democrat sits in the White House. In fact, the return gap is even more significant, especially for small-caps.

The table above shows both the simple arithmetic average annualized returns, e.g. 13.8% for large cap stocks and 22.6% for small cap stocks under a Democratic administration, and the geometric (Compounded Annual Growth Rate) returns, e.g. 7.4% for large caps and 4.9% for small caps under a Republican Commander in Chief.

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We have relied on data from our favorite source, Ibbotson Associates, for the previous two charts, but Standard & Poor’s has also put together info showing returns for its widely-followed S&P 500 Index from 1945 - 2006. It is interesting that no matter which political party’s leader sports an address of 1600 Pennsylvania Avenue NW, this large-capitalization-stock benchmark has been positive for 71% of the 62 annual periods with an average annualized rate of return of 9.0%, yet another reminder of why we are always partial to equities.

Of course, those who study the chart in greater detail will undoubtedly notice how well the S&P 500 has done in the 3^rd Year of the Presidency. I will discuss this phenomenon further in the December issue of The Prudent Speculator, but there certainly is historical precedent arguing for a favorable 2007, regardless of whether blue or red is the dominant color on the map this evening. And that's my kind of political advertisement!

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Opinions expressed are those of John Buckingham, which are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice. The information contained herein is believed to be reliable. However, such information has not been verified by us and we do not make any representations as to its accuracy or completeness.

Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels. In every investment strategy there is a possibility of loss.

Al Frank Asset Management (Al Frank) is an Investment Adviser, registered with the Securities & Exchange Commission, is editor of The Prudent Speculator (TPS) newsletter, editor and publisher of The Prudent Speculator TechValue Report (TVR) newsletter, and is the Investment Adviser to two value-oriented no-load proprietary mutual funds and individually managed client accounts.

The Geometric Mean is used to calculate the Compounded Annual Growth Rate (CAGR). The Geometric Mean of a return series over a period is the compound rate of return over the period. It is backward looking and measures the change in wealth over more than one period.

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