TheLiveBigWay* Digest – The Election, the Economy, and the Markets
The arrival of another presidential election year brings a fresh crop of articles asking (and answering, sort of) the question: which party is better for the economy and the stock market? Our own take is pretty straightforward: with respect to the presidency, there have only been 19 presidents since the beginning of the 20th century and only 13 since the advent of what we’d call the “modern economy” (starting with FDR in 1933) and, as any statistician will tell you, that’s too few data points from which to draw a valid conclusion.
And yet the question is always asked and always answered, most recently by Fox Business. Citing McGraw-Hill’s S&P Capital IQ, Fox reports:
Likewise, gross domestic product has increased 4.2% each year since 1949 when Democrats run the executive branch, versus 2.6% under Republicans.
Even corporate profits show a disparity: S&P 500 GAAP earnings per share climbed a median of 10.5% per year since 1936 during Democratic administrations, besting an 8.9% median advance under Republicans, S&P said.
Due to their “tax-and-spend” reputation, investors expect Democratic administrations to underperform Republican ones and be “poison to any portfolio,” Sam Stovall, chief equity strategist at S&P Capital IQ, wrote in a note. “History shows the opposite to be true, however.”
It turns out that the best performance for each party occurred during an unbroken stretch between 1981 and 2000, following the deep, though brief, recession that was triggered by Fed Chairman Paul Volcker’s decision to “break the back of inflation” once and for all by crunching the money supply. This set the stage for a secular bull market that lasted nearly two decades and spanned both Republican and Democratic administrations.
The best stretch of market performance since 1900 occurred in 1993-2000 under Bill Clinton, who saw the S&P 500 rally an average of 19.9% per year during his presidency, S&P said.
For Republicans, the strongest market action occurred from 1981-1992 when the S&P 500 climbed an average of 13.5% each year under Ronald Reagan and George H.W. Bush.
Finally, Fox Business turns to President Obama’s record, noting:
Under Obama, GDP has ticked up an average of just 1% each year, underscoring the anemic nature of the recovery. By comparison, GDP rose an average of 2.3% under George W. Bush and 4.2% under Clinton.
However, corporate profits have surged an average of 51.8% under Obama, the best out of any stretch of party control since 1933, S&P said. Profits increased at 12.5% per year in Clinton’s White House and 14.2% under Bush.
McCain points out that the surge in profitability in recent years “may be a little bit artificial,” driven largely by cost-cutting measures and delayed investments due to the economic uncertainty.
The S&P 500 has also climbed an average of 12.3% each year since Obama’s inauguration, far outpacing the 3.3% mean return for his predecessor.
“Both prices and earnings really bounced back during the Obama Administration. I’ll leave it to the pundits to say who gets the credit for that,” said Stovall.
In the end, the ultimate conclusion is probably NOT that we can make definitive statements about which party is best for the economy, but that, at the end of the day, presidential politics probably has a smaller impact on the economy and the markets than simplistic analyses and broad-brush cliches might suggest.
A NEW MEDICARE STRATEGY
Writing in the August 25 WSJ Weekend Edition, Ellen E. Schultz offers up a nice summary of the key elements of Medicare, the decisions participants must make, and ways of controlling costs. She notes the additional benefits available to Medicare participants as a consequence of the Affordable Care Act, including free mammogram and colonoscopy screenings and a phase out of the “doughnut hole,” which costs many seniors thousands of dollars in prescription drug costs. At the heart of the article, Schultz lays out the basics of Medicare in a clear, straightforward summary:
The basics: Under the traditional Medicare program, Medicare Part A, which covers hospitals and skilled nursing, and Part B, which covers doctor visits, are directly administered by the government. Your primary task is to enroll on time, generally when you turn 65. The Social Security website has the details.
You have the option—but not the obligation—to purchase supplemental Medigap insurance, which covers the 20% of costs that Part B doesn’t pick up. These Medicare supplement plans come in nine tiers, ranging from high-deductible policies, which have low premiums but high out-of-pocket costs, to Plan F, which offers the most comprehensive coverage.
Dozens of insurers sell these plans, including AARP and Blue Cross/Blue Shield. The good news is that the plans are standardized, meaning that each insurer has to provide the same benefits at each tier.
You must also choose a Part D prescription-drug plan if you want drug coverage under the traditional Medicare Part A and B program. Like Medigap, these plans are offered by dozens of competing companies; unlike Medigap, the coverage isn’t standardized, and the drugs available (the “formulary”) and prices vary.
Seniors may also choose a Part C “Advantage” plan, in which a private insurer provides Part A, B, and D coverage. Kaiser Permanente is one example of an organization offering such a plan. One of the ways that the Affordable Care Act pays for some of the new benefits mentioned earlier is by dropping the subsidies the government has been paying to Advantage Plan providers, which were costing the government 17% more than traditional Medicare as of 2010. Reducing these subsidies makes up about a third of the $716 billion in Medicare savings provided by the Affordable Care Act. Sara Kliff wrote a nice summary in the Washington Post describing the components of these savings. She also makes a point that has been lost in recent political debates:
It’s worth noting that there’s one area these cuts don’t touch: Medicare benefits. The Affordable Care Act rolls back payment rates for hospitals and insurers. It does not, however, change the basket of benefits that patients have access to. And, as Ezra pointed out earlier today, the Ryan budget would keep these cuts in place.
WHEN LIVE BIG EQUALS GIVE BIG
Four team members from our San Francisco office showed what it means to Give Big this past Saturday when they devoted the day to working on a Habitat for Humanity project in Daly City. The project, known as the 7555 Mission Street Development, consists of 36 condominium units and is the largest structure ever undertaken by Habitat in the Bay Area. The YeBu volunteers were Lauren Vitt, Cameron Farbotko, Dorothy Navales, and Jennifer Hicks (left to right in the photo below).
Lauren, Dorothy, Jen, and Cam spent the day painting the building’s exterior. Previously, Lauren and Jen had spent a day installing exterior fiberglass sheeting on an elevator shaft.
The 7555 Mission Street Development started in February 2011 and has an expected completion date in early 2013. The 36 low-income families who will occupy these units must contribute 500 hours of sweat equity and take on a mortgage provided by Habitat. The homeowners’ mortgage payments are used to finance ongoing Habitat projects.
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