It’s certainly no surprise that presidential politics are on the minds of lots of people these days. But I was still a little startled when twice in recent weeks I was asked versions of essentially the same question:  What’s the outlook for the market if we get a Democrat in the White House? 

One person told me she was not looking forward to investing in a market that could have to grapple with higher inflation, a declining economy and a Democrat as president. She said all the current uncertainty made her want to sit on the sidelines “until all this bad news is behind us.”  She didn’t specify whether she thought “all this bad news” included the prospect of a Democrat in the White House.

Let me say up front that I am not going to get into politics here, except to point out what should be obvious to anybody who thinks about it for even a few minutes: The party affiliation of the person in the White House is only one of hundreds of factors that may influence the economy and the market.

Remember that it’s Congress, not the president, that passes tax laws and appropriates money. And nobody can single-handedly control either inflation or the direction of the economy.

Still, I thought it would be interesting to see what history teaches us about markets when Republicans and Democrats control the presidency. According to a study by Ned Davis Research covering 1901 through the first half of 2008, the U.S. stock market’s real return after inflation during Republican presidencies was not radically different than under Democratic ones. The nominal returns under Democratic presidents were 7.2 percent, vs. 3.6 percent under Republican presidents.  But inflation was about twice as high under Democratic presidents, and the end result was a real return of 2.5 percent under Democrats and 1.69 percent under Republicans.

As I mentioned, Congress has a lot to say about things that may help or hurt the economy.  Historically the best combination has been a Democratic president and a Republican Congress. That produced nominal returns of 9.6 percent and real returns of 5.6 percent, according to this study.

What about inflation? One of the worst periods for inflation was 1974 through 1981, when Republicans were in the White House some of the time and Democrats some of the time. Inflation was 9.3 percent in this period; in 1974, 1979 and 1980, inflation rates were over 12 percent. Over this seven years, the Standard & Poor's 500 Index compounded at 7.9 percent, U.S. small-cap companies at 21.2 percent, U.S. small-cap value companies at 25 percent.

If you had combined these asset classes with U.S. large-cap value, international large-cap and international small-cap, you had an average return of 18.6 percent, twice the rate of inflation. (These are not returns of money that we managed or even recommended, only of indexes that we can track.)

I’m afraid that none of this history tells us much about which party we’d rather have in the White House. But there’s lots of history telling us whether to wait for things to clear up and get better before investing. And think of this: Once we all know who will be in the White House for the next four years, does that mean we will also know the direction of the economy and the stock market? I don’t think so. Instead, it just opens the way to an entirely new series of questions that can be answered only by the future.

Investors who wait on the sidelines for the uncertainty and bad news to go away aren’t usually successful. Almost always, they miss out on the most robust rallies in the stock market.

I wish more people understood how investing really works in real life. How it really works is this: Investors get paid for taking calculated risks. Want no risks? Buy Treasury bills. If you’re lucky, your money will keep up with inflation.

If you wait until there’s no bad news, there won’t be much risk either, and thus not much opportunity to make money. When the risks are very obvious, we naturally don’t want to jump in. Yet that’s exactly the time that we should invest if we want the best returns.

This, by the way, is equally true no matter who is in the White House.

Paul Merriman is a financial educator and founder of Merriman Berkman Next 

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