Some basic numbers with little analysis from Slate show the outperformance:
But Democrats, it turns out, are much better for the stock market than Republicans. Slate ran the numbers and found that since 1900, Democratic presidents have produced a 12.3 percent annual total return on the S&P 500, but Republicans only an 8 percent return. In 2000, the Stock Trader's Almanac, which slices and dices Wall Street performance figures like baseball stats, came up with nearly the same numbers (13.4 percent versus 8.1 percent) by measuring Dow price appreciation. (Most of the 20th century's bear markets, incidentally, have been Republican bear markets: the Crash of '29, the early '70s oil shock, the '87 correction, and the current stall occurred under GOP presidents.)
http://www.slate.com/?id=2071929One well known study showing the outperformance based on a fairly rigorous statistical analysis is briefly discussed here:
Should investors lean toward governments at one end of the country political spectrum to find outperforming equity markets? In their October 2003 paper entitled "The Presidential Puzzle: Political Cycles and the Stock Market", Pedro Santa-Clara and Rossen Valkanov examine monthly U.S. stock market performance versus executive branch party across 18 Presidential elections (1927-1998, 864 months) encompassing 10 Democratic and 8 Republican Presidencies. In their July 2006 paper entitled "Political Orientation of Government and Stock Market Returns", Jedrzej Bialkowski, Katrin Gottschalk and Tomasz Wisniewski investigate whether the political orientation of 173 different governments systematically affects the performance of 24 international (mostly European) stock markets. Findings are:
"The Presidential Puzzle: Political Cycles and the Stock Market" concludes that:
* The broad value-weighted stock market has beaten the 3-month Treasury bill (T-bill) rate by an average of about 11% under Democratic Presidents and just 2% under Republican Presidents -- an economically and statistically significant 9% difference. Equal-weighting of stock returns produces a difference of 16%, with small-capitalization stocks strongly outperforming large-capitalization stocks. (See the chart below.)
* The difference in returns holds for sub-periods 1927-1962 and 1963-1998, and is generally independent of business cycle explanations.
* The difference in returns is not election-centered. It accumulates gradually across Presidential terms, suggesting it is due to systematic surprises in economic policies.
* Volatility of returns is somewhat higher during Republican than Democratic Presidencies, indicating that stock market outperformance during the latter is not reward for risk.
* The party in control of Congress does not indicate significant differences in excess stock market returns.
* Given the limitations of the data, the impact of party-in-Presidency on the stock market in this study could be a statistical fluke.
http://www.cxoadvisory.com/blog/external/blog8-08-06/None of the studies I have seen offer an explanation for the outperformance under democratic presidents. I think it is because the rate of job creation always is higher under democratic presidents and budget deficits are much lower under democratic presidents.