Unlike most studies, which are based on total returns, Santa-Clara and Valkanov based their efforts on the average excess return of the indexes over the return of the three-month Treasury bill. The results were striking. When a Republican president held office, the value-weighted return delivered nearly a 2% premium over the T-bill. When a Democrat held office, the premium was nearly 11%. While the 9% difference clearly favors the Democrats, the results from the equal-weighted portfolio were even more telling, with a 16%+ result in favor of the Democrats. (To learn more about T-bills and other government securities, read 20 Investments You Should Know: Treasuries.)
Portfolio
Returns Under Republican Administrations
Returns Under Democratic Administrations
Value Weighted
1.69%
10.69%
Equal Weighted
-0.01%
16.52%
Figure 1: Excess returns of CRSP indexes versus three-month Treasury bill, 1927-1998
Further investigation reveals the results were generated by higher real returns and lower interest rates under Democratic administrations. Business cycle fluctuations showed no correlation to the results, demonstrating statistically significant outperformance for the Democrats regardless of underlying economic conditions. Value-weighted portfolios posted a steady 10% premium in favor of the Democrats, while equal-weighted portfolios came in at around 20%. (Read more about recognizing business cycles in Understanding Cycles – The Key To Market Timing.)
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For Higher Stock Returns, Vote Republican Or Democrat?
