Democrats, Republicans and the Stock Market

WRT this:

The stock market didn’t take off until 1997, after the Republicans won a House majority and passed a capital-gains tax-rate cut that Clinton, to his credit, signed. But like welfare reform, another popular initiative that Clinton had no choice but to go along with, it was an essentially Republican idea that Congressional Democrats blocked as long as they could. And now that we are again enjoying a strong economy and stock market, in part because of Bush’s 2003 capital-gains tax-rate reduction, Democrats who want to raise taxes by canceling that tax reduction want us to believe that Clinton was solely responsible for the late-’90s boom. Is the Democrats’ current behavior an example of irony or merely chutzpah?

UPDATE: A commenter points out that the market took off around 1995 rather than in 1997. That’s true but it doesn’t affect the validity of my point. As another commenter notes, the market rally began immediately after the Republicans took control of the House, because everyone expected a cap-gains tax cut. I assume this was because everyone expected a cap-gains tax cut.

Here are some charts:

S&P 500 Index


NASDAQ 100 Index

UPDATE 2: The NASDAQ 100 chart above shows the performance of shares in high-growth tech companies. These companies benefited disproportionately from cuts in capital costs and thus from cuts in capital-gains tax rates. Note the increase in this index’s growth rate beginning around 1997. The same effect is visible to a lesser degree in the chart of S&P 500 index values.

UPDATE 3: Actually, the effect is visible in all three charts.

22 thoughts on “Democrats, Republicans and the Stock Market”

  1. I think it less important to look at parties per se and instead look at the type of ideas that got implemented. Once we understand the effective ideas, we can look at which party will best convert those ideas into policy come any particular election time.

    I think it clear that the last 15 years have been very good and I think it also clear that the ideas that have dominated this era have been those of free-market, entrepreneural capitalism. More than any other era in the last 100 years, we have turned away from trying to use centralized political power to manage the economy and things have gone very well regardless of which party held which branch of government.

    Contrast this with the economic progression of say 1965-1980 when the opposite trend dominated. Nixon held the presidency for most of the 1965-1980 era yet the ideas he implemented (such as wage and price controls) were not those we would today associate with Republicans. Yet at the time, the majority of people thought those sound ideas.

    The problem for the Democrats is that their highly energized left-most elements look back upon 70’s with great nostalgia. Even though it was a rough time for the country, it was a great time for Leftist and I think they want to go back to that. One really has to ask whether centrist Democrats and a Democrat president can prevent a return to the bad old days.

  2. It is simply false to claim that the stock market didn’t take off until after the passage of the capital gains cut.

    Hereis monthly S&P data from ’95 through the end of ’99:

    In ’95 the S&P went from 459.31 to 615.93, for a gain of 34%.
    In ’96 it went from 615.93 to 740.74, for a gain of 20%.

    The capital gains cut was passed in mid ’97.

    In ’98 it went from 970.34 to 1229.23, for a gain of 27%.
    In ’99 it went from 1229 to 1469, for a gain of 20%.

  3. Shannon, I agree with you. I’m just arguing that the Democrats are not making sense. Even if Clinton deserves more credit for the 1990s boom than I think he does, the govt policies that made that boom and the current boom possible — lower taxes, free trade — are the opposite of the policies the Democrats are advocating now.

  4. As a long time exchange member and options trade, I can pin point the date at which the market took off. The day after the 1994 elections in which Newt and Co. took over.

  5. Anticipation of the 1997 tax cut caused the 1995 boom? You’re kidding – right? Did the crash occur because folks thought George W. Bush would raise tax rates? Unbelievable!!!

  6. Jonathan,

    the govt policies that made that boom and the current boom possible — lower taxes, free trade — are the opposite of the policies the Democrats are advocating now.

    I couldn’t agree more.

  7. Look at the charts again. One can make a very strong case that the market took off in 1983 as a result of Reagan’s cuts. The percentage increase from 1983 to 1995 exceeds or equals the percentage increase from 1995 to 2000. Prior to 1983, the market had been in a slumber since 1965.

    I take nothing away from the republican Congress in 1997, and see its actions as necessary to the continued economic growth, but we can’t ignore that the chart shows the rally beginning in 1983. A log chart gives better perspective.

    1995 to 2000 did have a steeper rate of increase, and was followed by a correction of the entire 1983 to 2000 rally, not just the 1995 -2000 rally. When we look at the effects of politics on the market, an interesting question is why the market tanked in 2000 with a republican congress and republican president. It’s just not that easy.

  8. I was living in San Jose, CA in June 2000 when the market tanked, right after the decision for the Micrososft Anti-Trust lawsuit.

    It’s so obvious why the stock market collapsed… The market sank because it was OBSCENELY bloated by people investing unwarranted sums of money in new companies that had no valid business plans. A lot of the weath creation in the late 1990s was based on thin air and into thin air it went.
    To me it’s the perfect metaphor for the Clinton Years.

  9. Let’s see, “irrational exhuberance?”

    We had a recession – 7% unemployed, 93-94, the real stirrings of no more bricks and mortar, the peso and baht collapse, smart money got out in 99 and it was also Y2K, Bob Brinker 1/11/00 – GET OUT NOW in a separate mailing and….

    I didn’t listen.

    Looking back, how stupid, after everyone loaded up on comm stuff and fixed their systems so their systems wouldn’t crash to think after everyone’s loaded to the gills it could keep on going. Down it went then 9/11 happened, we are so lucky we are relatively unscathed.

    On the bright side, Brinker, FWIW, thinks we may test the 3/24/00 S & P 500 level of 1527.46

  10. >why the market tanked in 2000 with a republican congress and republican president. It’s just not that easy.

    Oh I missed the obvious here too…. in 2000, Clinton was President.

    I know you leftists like to view everything in a Blame the Republicans For Everything prism.. but the efforts to pin the 2000 reccesion on Bush was never an effective tactic.

  11. Elliot,

    The market took off in 1983, 1995, 1997 — all true.

    My point was simply that the 1997 acceleration was strongly correlated with the 1997 cap-gains tax cut. And the 1995 takeoff was strongly correlated with anticipated tax cuts. Meanwhile some of the public figures who resisted the 1997 cap-gains tax reduction, and other tax-rate reductions, and who now want to raise tax rates on capital, are attributing the tech boom and stock market boom of the late 1990s to everything but lower taxes on capital. These people are mistaken.

    If Clinton’s policies were responsible for the boom, why did the boom begin in earnest only after 1995? And why did it accelerate in 1997?

    Log charts don’t show changes in the rates of appreciation of the various indices as clearly as linear charts do.

    And yes, the market tanked after the boom. Does this mean it was bad policy to lower the cost of capital? I don’t think so. Cheaper capital made possible many experiments, most of which failed but some of which became the big successes of Web 2.0. That’s how innovation works, and I think we are all better off that that first tech boom happened.

  12. If you want to understand the stock market explosion beginning in 1995, you need to dig out charts of the 10 and 30 year Treasury bonds. These charts will show that their yields peaked on Election Day in November, 2004. The belief that a Republican House would limit spending caused prices to go up (yields down) and an accomodative Fed was happy with the deflationary impact of this move. Unfortunately, Greenspan got spooked by the Y2K predictions of doom and made money so cheap that cash was borrowed in enormous sums and funneled into the tech boom. The Dow peaked in February of 2000 and the NASDAQ in mid-March (at 5200!!!!). The unwinding gave us the recession in the 4th Qtr. of ’00 – just as Clinton exited.

  13. Wow.. yet another attempt to blame Republicans.

    Did you somehow forget about the deflationary economic crisis of 1998 – 1999?

  14. I’ve seen the dems talking point-“balanced budget”…

    not that they should explain that a budget is a combination of revenue MINUS outlays.

    the gop never gets the credit it deserves for the success they helped the Clinton WH(and thus the american people) attain.

  15. When trying to link economic performance to elections we should remember that the impact of any given election lags a year or more behind the actual date of the election.

    For example, a president is elected at the end of one year, assumes office at the beginning of the next year but his policies only come into force by the beginning of his second year in office. Likewise, the effects of his policies remain largely in force a year after he leave office. S Reagan is elected in 1980, assumes office in Jan 1981. As a practical matter, 1981 is mostly governed by the budget and policies enacted during 1980. 1982 is really the first year in which his policies could be considered controlling. His policies governed 1989 even though he left office the year before.

    So really, in evaluating the impact of the policies of various Presidents we should offset the dates two years from the date of election or one year from the date of assumption of office. So Reagan’s span ranged 1982-1989, Bush41 1990-1993, Clinton 1994-2001, and Bush42 2002-2009.

  16. >I know you leftists like to view everything in a Blame the Republicans For Everything prism.. but the efforts to pin the 2000 reccesion on Bush was never an effective tactic.

    Oops. I hope I’m not being tagged as a Leftie blaming Bush for the market correction. I really don’t think the president has that much control over the economy, and even less over the markets. Giving credit or blame for market activity to a president obscures the huge complexity of the economy. The most he can do, and the most a congress can do, is to provide some upward or downward pressure on the economy.

    That pressure combines with all sorts of other variables to move the markets. We saw the markets start their move in a period of high capital gains taxes. That was a negative pressure, but insufficient to keep a lid on things. Reagan’s income tax cuts were a positive pressure. But Bush’s tax cuts weren’t enough to overcome other negatives. Both presidents cut taxes, and we saw opposite results. Too many other factors are in play.

    For those who blame Clinton for the recession, what exactly did he do? He didn’t create the bubble. Should he have gone out and told folks to stop buying stock and cut back the IRAs pouring billions into the market every month?

    I suggest the market credit and blame game is simply a convenient way to score political points. If a your party is in power and the market goes up, take credit. If it goes down on the other guy’s watch, then blame him.

    If we get attached to evaluating sound economic policy by looking at relatively short term market moves, we will probably end up with bad economic policy. The capital gains tax cuts of 97 were sound policy regardless of where the market went in the months and years just after the cuts.

    Does anyone remember what president was in office when IRAs were introduced? We’re still riding that upward pressure.


    Here’s a link to a site showing both linear and log charts of the Dow. Both are useful depending on one’s purpose. I prefer the log chart for longer periods when comparing changes.

    I couldn’t find an online log chart of the Dow in constant dollars, but that’s also very a interesting tool.

  17. Elliot,

    I don’t see the point of using log charts (or moving averages or other transformations) for this exercise. They don’t show rate changes as clearly as linear charts do. I also don’t see the point of a constant-dollar comparison. The market price behavior I was talking about happened over short enough periods that inflation wasn’t significant. I was making the point that the market rally accelerated after the 1997 tax cut. It’s true that that part of the rally began after the 1994 election, but that fact doesn’t affect my argument. In both cases the market responded to changes in actual or anticipated capital costs. The fact that the market later tanked doesn’t change any of this. The fact that the bull market originally began around 1982 doesn’t change any of this. And the fact that the 1990s bull market occurred while Clinton was president doesn’t mean that Clinton’s preferred policies brought about the rally. This last point is important, because partisans are now relying on widespread misunderstanding of the 1990s boom to argue for reintroduction of the failed high-tax policies that had to be swept away before the boom could happen.

  18. Elliot, I never heard anyone blame the Recession on Clinton. I was hoping you would catch the absurdity of what I had said about how Lefties try to blame the 2000 recession on Bush… Becauase Bush wasn’t president until 2001. yet I could probably search through my chat logs and show you the number of idiots i have argued with online who insisted that Bush was to blame for it.

    And saying that no bush wasn’t the cause of it, isn’t the same thing as saying that Clinton was the cause of it. Clinton had nothing to do with the stock market’s rise or fall in the 1990s.

    The market is a good metaphor for Clinton because most of the gains were based on fantasy , in reality there was nothing there.

  19. Jonathon,

    What rate change do you mean? I presume you mean the index at the end of a period divided by the index at the beginning of the period. Log charts make it easy to compare changes in one period to changes in another.

    I encourage people to use whatever charts are most meaningful for them. The point of using a log chart is that a vertical move on the chart of a given length always represents the same percentage change. Those interested in easily comparing percentage cnanges over time may find these charts useful.

    For example, look the the crash of 1929 on the nominal chart. It hardly even registers, although the Dow fell from 400 to 145. But, look at it on the log chart and it is quite obvious it was the worst crash in the market’s history. Such moves should not be lost on us in evaluating policy.

    The reason I find these charts useful in this discussion is because it helps to put market moves in context. While we may be looking at a particular five year change, it’s nice to know how many other periods showed similar changes in the rate the market returns. We can then position various political events around these moves. If market moves are being used as a measure of the success of political events, this is important.

    A constant dollar log chart shows the change in real value over time. I suggest real value is important if we are going to be evaluating policy based on a market index rate of change.

    If one is only going to look at the period beginning in 1997, a nominal chart will do well. However, if one wants some standard by which to judge that period, other tools are useful.

    I don’t dispute the market move of 1997. That’s history. However, I do hesiitate to attribute too much to single variables.

  20. I’m suprised at the focus on legislation. Sound fiscal policy by the government is important for the overall and long-term growth of an economy, but monetary policy has a much bigger affect on markets, especially, or at least, in the short term.

    Monetary conditions had no small effect on the 90’s market rally. Bailouts in Aisa and Mexico (and to a lesser extant LTCM) had a expanding effect on money supply and the tenuous bond situation caused Greenspan to loosen when he needed to tighten. This had more affect on the market than any legislation in the 90’s.

    A parrellel can be drawn to the last market bubble in the 20’s when the new york bank loosened money supply to help Britain, when they really needed to be restraining growth.

    Luckily Greenspan didn’t compound mistakes and responded with very loose money, especially after 9/11.

  21. And to the idea that Clinton had nothing to do with the 90’s market… Those bailouts were strongly encouraged by Treasury secretary Rubin, (Goldman Sachs?) investment banker whose former friends were holding alot of the paper he was keeping afloat. Draw your own conclusions. (Just ask yourself who made all the money floating junk internet companies in the 90’s? The biggest winners were all on Rubin’s speed dial before he even became secretary)

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