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The following is an excerpt from the Oct. 15, 2004 issue of InvestTech Research's Market Analyst newsletter.

As the election approaches, market tension has increased. Every daily twist and turn is being attributed in the media to some external factor -- whether it be the tight Presidential race, record oil prices, or the impending threat of another terrorist attack. In reality, all election years seem to be tense for investors. Even in 1980, when Ronald Reagan won by a landslide against President Jimmy Carter, the anxiety was heightened. But then the tension came from double-digit inflation and record high interest rates. Perhaps this is one reason that election years often don’t turn out to be big gainers on Wall Street. Instead, to the disappointment of bulls and bears alike, their primary attribute is simply stability. Only one Presidential election year since 1945 has experienced over a 3 percent annual loss in the S&P 500 Index.

As this issue goes to press, the S&P 500 Index is at 1,113.65 -- or up less than 1 percent from where it entered this seemingly tumultuous year. And perhaps surprising to many investors, one might expect that stability to continue right through year-end. Only one Presidential election year since 1920 has seen over a 1 percent loss between October 13th and year-end. So in spite of all the fears, tension, and investor anxiety, the historical odds do not point to high market volatility or risk between now and year-end.

From purely a historical perspective, one might say that 2004 is not shaping up as an "average" election year. Thus far, the year-to-date gain is just 1 percent for the S&P 500 Index; and the increasingly long series of declining tops and bottoms does not seem to portray the traditional image of market stability.

Part of the reward of having your own research team and historical database is the ability to ask all the historical "What if?" questions. Others have to rely on studies performed and publicized by someone else. And very often –- particularly in the case of mutual funds -- this analysis has been doctored or massaged to enhance a biased opinion or motive. Example: the one-sided studies that use "Here’s what happens if you miss the XX best months" as an argument to as an argument to always stay fully invested.

Democrat vs. Republican – Which is better for stocks?

When I started InvesTech Research 25 years ago, the answer was clear, and widely publicized: The stock market performs better under a Democratic President. All the historical studies supported this conclusion, and the reasoning was that the economy and stocks get more boost from the "free-spending" ways of a liberal President. Between 1945 and 1980, the stock market’s total return was 3 times better under Democratic Presidents than Republican Presidents, even though Democrats held the office only slightly (25 percent) longer.

However, as you’ll see in the accompanying bar chart, the Reagan years changed that Wall Street truism (another one bites the dust!). By the early '90s, the balance had shifted decisively in the opposite direction. Over the 47 years from 1945 to 1992, the stock market’s total return was twice as good under Republican Presidents than under the Democrats (albeit with an additional two terms under the Republicans’ belt). But watch out, for then came the Clinton years ... along with the Greenspan bubble. The longest bull market in U.S. history again swung the pendulum back in favor of the Democrats. By the end of 2000, the market’s total return was again in favor of a Democratic President ... and by almost a 2-to-1 margin, in spite of both parties holding the office for exactly the same time (seven terms each).

Bottom line: Does the market perform better under a Democratic or Republican President? The answer depends entirely on who you ask, and over what time period they “massage” the numbers. From our perspective, there is no real advantage or difference in stock market returns regardless of which party gets elected to the White House.

Election Day -- What should one expect in the closing months?

As we said earlier, the closing months of an election year often prove to be even more stable than the overall year itself. More specifically, between October 13th and year-end...

• Only one election year since 1920 has experienced over a 1 percent loss in these 10 weeks (that was a 3.6 percent loss in 1948). In fact, even as the bubble of the late 1990s was unwinding in a 3-year bear market, the S&P 500 rallied 5.8 percent over this period in 2000.
• Double-digit gains are also rare for this 10 week period, with the last one occurring in 1928.

In the vast majority of cases, the stock market was at, or very close to, a yearly high in these months immediately surrounding the election (September through November). As shown in this table, 2004 again seems to be more of an aberration than the norm. Only four election years in the past century have been worse off (further from achieving a yearly high) at this juncture.

In 15 of 26 election years since 1900, the Dow Jones Industrial Average hit its high for the year in the 4th quarter (denoted by check marks). More importantly, in the present scenario, only 3 of 26 election years since 1900 have seen the DJIA hit its low for the year in the 4th quarter. In fact, the only other time since 1960 that the DJIA hit an election year low in the 4th quarter was in 1992, when President Bush Sr. was running for re-election ... and lost.

This exemplifies how unusual it would be to see the DJIA drop under 9,814 (this election year’s low of August 12th).