on the following trading day. The death of Warren Harding in 1923
caused a milder setback, which was soon erased. Sell-offs such as these
provide good opportunities for investors to buy stocks since the market
usually reverses itself quickly following the change in leadership.^3DEMOCRATS AND REPUBLICANS
It is well known that the stock market prefers Republicans to Democrats.
Most corporate executives and stock traders are Republicans, and many
Republican policies are perceived to be favorable to stock prices and
capital formation. Democrats are perceived to be less amenable to favor-
able tax treatment of capital gains and dividends and more in favor of
regulation and income redistribution. Yet the stock market has actually
done better under Democrats than Republicans.
The performance of the Dow Jones Industrials during every ad-
ministration since Grover Cleveland was elected in 1888 is shown in Fig-
ure 13-2. The greatest bear market in history occurred during Herbert
Hoover’s Republican administration, while stocks did quite well under
Franklin Roosevelt, despite the fact that the Democrat was frequently re-
viled in boardrooms and brokerage houses around the country. The im-
mediate reaction of the market—the day before the election to the day
after—does indeed conform to the fact that investors like Republicans
better than Democrats. Since 1888, the market fell an average of 0.5 per-
cent on the day following a Democratic victory, but it rose by 0.7 percent
on the day following a Republican victory. But the market’s reaction to
the Republicans’ success in presidential elections has been muted since
World War II. There have been occasions, like Clinton’s second-term
election victory, when the market soared because the Republicans kept
control of Congress, not because Clinton was reelected.
It is also instructive to examine the returns in the first, second,
third, and fourth years of a presidential term, which are displayed in
Table 13-2. The returns in the third year of a presidential term are clearly
the best, especially since 1948. It is striking that this is true since the third
year includes the disastrous 43.3 percent drop that occurred in 1931, dur-
ing the third year of Hoover’s ill-fated administration and the worst 1-
year performance in more than 120 years.
Why the third year stands out is not clear. One would think that the
fourth year of a presidential term, when the administration might in-CHAPTER 13 When World Events Impact Financial Markets 227
(^3) But there are some whom the market never forgives. Stocks rallied over 4 percent in the week fol-
lowing the news of the death of Franklin Roosevelt, who was never a favorite on Wall Street.