Yesterday we said that policy, not politics, has a strong effect on the market. But which policies?
When we look at real stock returns by administration, success and failure appear pretty bipartisan. We examined the S&P’s real total return for the four fiscal years following each administration’s election since World War II.
The best two returns were from Clinton’s and Eisenhower’s first terms. The worst returns were from Nixon’s second term and Truman’s first. What’s the common theme here? Inflation. Clinton and Ike enjoyed low inflation; Truman and Nixon got it in spades.
Falling inflation helps stock prices: multiples rise as bond yields fall. But just having a very low inflation rate is enough. Ike’s administration had low and stable inflation, and stocks rose dramatically.
If inflation is so important, why don’t more candidates focus on it? It may be that taking the disinflationary medicine is like eating your vegetables–useful, but not very pleasant. Or it could be that our politicians and their media colleagues just don’t understand the issue.
Douglas R. Tengdin, CFA
Chief Investment Officer
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