A major difference in returns from large-capitalization stocks, small-capitalization stocks, various bond indexes, and cash followed elections won by Democratic and Republican presidents from 1928 to 1993. Small-cap stocks had significantly higher returns during Democratic administrations than during Republican administrations, primarily reflecting a lack of losses in the April–December period. This phenomenon was not a manifestation of the January small-firm effect. Indeed, the results indicate a significant small-cap effect outside January during Democratic presidencies. Large-cap stocks had statistically identical returns under both administrations. For both Democratic and Republican administrations, small- and large-cap stock returns were significantly higher during the last two years of the presidential term than during the first two years. Corporate, long-term government, and intermediate government bonds and cash had significantly higher returns during Republican administrations.

From 1937 to 1993, the simple investment strategies of investing in small-cap stocks during Democratic administrations and either intermediate-term government bonds or large-cap stocks during Republican administrations produced higher mean returns—with higher standard deviations—than did investing in large-cap stocks throughout the period. The cumulative wealth from these “politically correct” investment strategies greatly exceeded that from other strategies—small- and large-cap stocks, all types of bonds, cash, and a 60/40 stock/bond mix.