Analysis: Index Portfolio Performance during the Bush Administration's First Six Years

George W. Bush became the 43rd President of the United States on January 20, 2001. Until January 4, 2007, when the Democrats took control of both the U.S. House of Representatives and the Senate, the Republicans had controlled both the Executive and Legislative branches of the federal government, save for a brief period in mid- to late-2001 when a Republican-turned-Independent caused an even split in the Senate. Over the past six years, then, the financial house of this country has been in the virtually uninterrupted hands of the GOP, during which time the federal government went from running growing budget surpluses in the last years of the Clinton Administration to bleeding hundreds of billions of dollars in red ink every year under President George W. Bush and his congressional allies. A list of other calamities of Republican rule would necessarily include, but not be restricted to, an uncontrolled and debilitating regime of trade deficits; a spiraling conflict in the Middle East; and, of course, the first successful attack by a foreign enemy on cities in the continental United States in almost 200 years.

The Republican Party, through its legislators in Congress and its President in the White House, has also overseen what must be described as nothing short of abysmal performance of the U.S. stock markets, which represent the overwhelming bulk of the value of all public ownership of American corporations. It is in the stocks traded on these exchanges that much of the wealth of the nation is invested by everything from huge pension and mutual funds to individual speculators.

Blame for the miserable performance of the stock markets over the past six years rests squarely with the GOP, which rode into office on a long-standing platform of fiscal prudence and policies tilted toward economic growth through low taxes and reduction of regulatory hurdles to business investment and growth. The Republican Party has failed, despite its blustering rhetoric and the curiously rosy data pumped out from the government agencies it controls.

As of Friday, January 19, 2007, George W. Bush had been President of the United States 2,188 days, two days short of exactly six years. Economic policy during those six years has been completely controlled by President Bush and his Republican Party members in Congress. Democrats had no control over the formulation of economic policies and the federal budgets arising therefrom. They were shut out of taxation and spending decisions by uncompromising rules and actions imposed by the Republicans, who showed no intention of or interest in consensus in governance. Responsibility for the huge federal budget deficits year after year that have hallmarked the rule of the Republicans rests squarely with their party, its legislators in Congress, and the policy-makers in the White House, including George W. Bush, himself.

The public sector has suffered the long-held hope of certain branches of conservativism that the federal government could be reduced in size, crippled in carrying out certain of its regulatory duties, and diminished in its tax revenue generating capacity. The desired goal of this political prescription of "limited government" is that, through the diminishment and degradation of the public sector, the private sector would flourish. No reasonable argument could be made that, if the private sector were indeed the great beneficiary of entrepreneurialism at its most productive, ownership in business would reflect this through substantial returns on equity. Investors in the stock markets of the United States, particularly investors abiding by prudent portfolio diversification rules and reasonable buy-and-hold strategies, should have seen appreciation in the real value of the money they invested in stocks. This is the necessary reward to induce surrender of current consumption. It is the motivation for all rational investors, be they individuals of limited means or great mutual funds: the goal of investing in the stock market is to have at a future time more purchasing power by foregoing current consumption opportunities. For many Americans, long-term investments in stocks and other securities are to the end of having some degree of financial security in retirement. For businesses, the accumulation of equity positions in other companies is in its ideal a signal of calculated judgment that gain is to be had through the long-term, expected future cash flows of acquired enterprises.

From the first day of trading, January 22, 2001, after President Bush became the 43rd President of the United States, until the last trading day, January 19, 2007, before the publication date of this article, the performance of the major stock markets—measured by the index portfolios of the Dow Jones Industrial Average, the Standard & Poor's 500, and the NASDAQ Composite—has been abominable. Only the Dow Jones Industrial Average managed to achieve a positive real return on investment over the past six years, and that return was a miserly half-a-percent on an annualized basis, a level of performance that would get any fund manager taken out and shot.

January 22, 2001, was the first day of trading after Mr. Bush became President. The three major stock market indices stood at the following levels at the close of trading on that day:

January 22, 2001, Index Closing Values
     Dow Jones Industrial Average: 10,578.24
     Standard & Poor's 500: 1342.9
     NASDAQ Composite: 2757.91

At the close of trading on Friday, January 19, 2007, these same three averages stood at the following levels:

January 19, 2007, Index Closing Values
     Dow Jones Industrial Average: 12,565.53
     Standard & Poor's 500: 1,430.50
     NASDAQ Composite: 2,451.31

If an investor were to have formed a portfolio based upon each of these three indices and managed each portfolio in terms of composition and balance to mirror the relevant index, the investor would have earned the following total nominal returns on investment over the 2,188 days from January 22, 2001, to January 19, 2007:

Total Nominal Portfolio Returns over 2,188 Days
     Dow Jones Industrial Average: +18.79%
     Standard & Poor's 500: +6.52%
     NASDAQ Composite: —11.12%

Expressing these returns on an annualized (that is, "percentage return per year compounded") basis, the nominal results just presented are as following:

Annualized Nominal Portfolio Returns over 2,188 Days
     Dow Jones Industrial Average: +2.91% per year
     Standard & Poor's 500: +1.06% per year
     NASDAQ Composite: —1.95% per year

The above are nominal (that is, "not corrected for inflation") results. Taking into account the erosion of purchasing power (that is, "the effect of inflation") on portfolio values over the holding period requires adjusting each of the current values to its equivalent purchasing power value on January 22, 2001. From the Bureau of Labor Statistics Consumer Price Index data for January 2001, the CPI stood at 175.1, and for December 2007, the CPI stood at 201.8. The January 2007 figure can be estimated by various methods, and here, a conservative projection of 201.83 is derived from the three-month moving average of the CPI, implying an annualized inflation rate for the current month of nearly zero, based upon the average of the annualized inflation rates for the previous three months.

Expressing the closing index portfolio values as of Friday, January 19, 2007, in terms of their January 2001 purchasing power equivalents provides the following results:

January 19, 2007, Index Values in January 2001 Purchasing Power Value
     Dow Jones Industrial Average: 10,901.18
     Standard & Poor's 500: 1241.03
     NASDAQ Composite: 2126.63

The total real return on investment for each portfolio is then the quotient of the January 2001 index value when divided into the adjusted January 19, 2007, value:

Total Real Portfolio Returns from January 22, 2001, to January 19, 2007
     Dow Jones Industrial Average: +3.05%
     Standard & Poor's 500: —7.59%
     NASDAQ Composite: —22.89%

Finally, expressing these real returns on an annualized (that is, "percentage return per year compounded") basis, the total real return results just presented are as follows:

Annualized Real Portfolio Returns from January 22, 2001, to January 19, 2007
     Dow Jones Industrial Average: +0.50% per year
     Standard & Poor's 500: —1.31% per year
     NASDAQ Composite: —4.24% per year

The results above are summarized in the following chart:


The total and real returns to the selected portfolios are presented below in graphical form:



An investor forming a portfolio tracking the Dow Jones Industrial Average from the beginning of the Bush Administration in January of 2001 until January 19, 2007, would have realized a total gain in real value of the portfolio of just over three percent, which is equivalent to an annualized, compounded rate in purchasing power of the portfolio over the term of the Bush Administration of just one-half percent per year; the investor forming a portfolio tracking the Standard & Poor's 500 over that period would have suffered a total loss in real value of the portfolio of more than seven-and-a-half percent, which is equivalent to an annualized, compounded annual rate of loss in purchasing power of the portfolio over the term of the Bush Administration of about one-and-a-third percent per year; and the investor forming a portfolio tracking the NASDAQ Composite index over that period would have suffered a loss in total real value of the portfolio of almost twenty-three percent, which is equivalent to a compounding rate of loss in purchasing power of the portfolio over the term of the Bush Administration of about four-and-a-quarter percent per year.

From a well-balanced portfolio of the common stock of reasonably low-risk, very large public corporations to an equally well-balance portfolio of the common stock of relatively riskier, small-cap public corporations, common stock—the equity (that is, the "ownership") claim on corporations—has provided real returns over the course of the Bush Administration that were at best miserably anemic and more likely significantly negative.

Securities markets do not make long-term assessments of the value of the American economy based upon political biases: billions of shares of stock trade each day, and the total value of these trades is so great as to be almost incomprehensible. Over the past six years, the absolute control of the government by the Bush Administration and its Republican allies in Congress has been subject to an on-going, objective assessment by the securities markets of the United States. The result to date of this real-value assessment is that the American economy, as represented by the market values of stocks of large, medium, and small public corporations, has not grown. This is an undeniable, unavoidable fact delivered by the very stock markets whose large-scale participants by and large support the Republican Party, its goals, and its politicians.

Regardless of how large the nearly daily dose of good economic news the Bush Administration induces the mainstream media to repeat, the Administration can neither manipulate the stock market data, nor can it find a scapegoat for the broad-based, long-term depletion of private equity value its policies have caused.

The performance of stock markets has real consequences for average, working Americans. The money they invest is money they surrender using in the here and now, hoping, as they do—indeed, trusting—that their foregone current consumption will be rewarded with greater purchasing power later, very likely in their retirement years when they are no longer generating significant income through work. When the stock markets fail to provide that reward, and especially when they fail so strikingly over a six-year period, those average investors have effectively seen their decision to invest rather than consume prove to have been wrong and harmful to their self-interest. For the average Americans who plan for retirement in part or in whole based upon investments made and held in the stock market over many years, the Bush Administration's record is nothing short of catastrophic in terms of people's financial security. For most, however, the full realization of the value lost and the disrupted, nearly irreparable damage to future capital appreciation of their investments in the stock markets will come only after the era of the neo-conservatives has come fully to an end, and it will then be the grim responsibility of future politicians to do what little can be done to rectify the mess the GOP left in the wake of its shameful leadership at the beginning of this century.


The Dark Wraith will provide frequent and pointed reminders during the time to come of why the financial house of this nation is the wreck that it surely will be.