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A Republican victory in the US election is better for the stock market, or so conventional wisdom dictates. Tax cuts, deregulation, minimal state interference: these are the traditional values of the Grand Old Party, and they are also the values associated with big business.

Up until this year, that is. As interventionism stages a comeback in the financial sector, it is time to re-cut the old clichés. Research by Morgan Stanley reveals equity markets have consistently delivered stronger returns under Democratic presidential administrations. From 1904-2007, the annualised return of the S&P 500 index was 6.7 per cent under Democrats, compared with 4.7 per cent under Republicans.

In the 1990s, the line between Democratic blue and Republican red was admittedly blurred into Bill Clinton’s trademark pink. But the analysis holds up even excluding the Clinton administrations, says the report.

This runs contrary to most traditional perceptions. Morgan Stanley notes that 82 per cent of its analysts think the companies they cover see a Republican administration as creating a more favourable environment. The immediate stock market reaction to election results also suggests traders prefer Republicans. Since 1904, the S&P has been up 2.5 per cent in the November following a Republican win, but down 0.5 per cent in the month after a Democratic victory.

“The potential for tax increases can be seen as bad news for corporate America,” says David McCraw, manager of the Edinburgh US Tracker trust. “It seems to be the general view that markets have not performed as strongly during periods when there has been a Democratic president.”

Nor is the Democrat effect limited to the stock market. GDP growth, employment, consumer confidence and the dollar have all been stronger under the party of Franklin D Roosevelt. In fact, the only major area of the investment arena that has historically been favoured by Republican presidents has been bonds – traditionally negatively correlated with equities. Average annualised long-term government bond returns have been 7.9 per cent under Republicans, but only 2.7 per cent under Democrats.

This is one of the few statistics Francis Hudson, global thematic strategist at Standard Life Investments, feels comfortable with. “If you’ve got a Democratic government with ambitious spending plans that are going to require heavy bond issuance, that will depress prices,” she explains. Falling bond valuations will in turn push up yields and interest rates, boosting the currency.

But she is more sceptical of attempts to identify direct links between the presidential election cycle and the stock market. “You can draw up tentative correlations but I don’t think you can find causal relationships between the government and the S&P 500,” she says.

Whether or not it makes sense to rationalise the correlations into logical chains, anyone who is thinking of allocating money to US equity needs to bear the historical patterns in mind. The first coincidence to note, for example, is that both the stock market and the presidential elections work in four year cycles. This may, or may not, be chance, but it makes analysing the statistical links between the two unusually satisfying – compared with the UK, for example, where the terms of the premiership are irregular.

The Morgan Stanley report, for example, finds that returns are historically skewed to the third and fourth years of an administration. Since 1904, the S&P 500 grew 12.7 per cent on average in the third year. The first year has historically fared worst, with a mean return of 3.1 per cent.

The researchers find a rationale for this: “A sitting president is most inclined to make difficult policy choices that may have short or long-term negative market implications in the years one and two of his administration. If those policy choices are market friendly, the positive results will not likely be seen until years three and four because of the implementation lag associated with policymaking.”

This may be clutching at straws, but the data is nonetheless compelling. It suggests asset allocators can profit by buying US equities towards the end of the second year of the presidential cycle and sell at the end of the fourth year. Research at the Graziadio School of Business and Management has back-tested this investment strategy, with remarkable results.

Mr McCraw finds such historical tests useful, but stresses they need to be taken with a fistful of salt. “The presidential cycle is not the only factor in the stock market, especially if your base currency is sterling. You have to be aware of corporate profitability, stock market valuations, where you are in the economic cycle, and the potential for currency falls if you’re investing from abroad,” he explains.

But if it is spurious to conclude just how much credit US presidents and parties deserve for the highs and lows of the S&P 500, it is quite easy to show the impact the S&P 500 has on the presidential election result.

Before 2008, the US economy had been in recession in four election years since 1904: 1920, 1932, 1948 and 1960. In these years, the S&P 500 fell on average 3 per cent – outperforming all expectations for 2008, with the S&P 500 down 21.2 per cent for the year to 27 October. The incumbent party lost all of these contests bar one – the infamous 1948 campaign that saw Harry Truman hold onto power in what historians generally consider the greatest electoral surprise in US history. With this in mind, it would be almost unprecedented if Barack Obama did not take the White House on 4 November.

But investors should not expect an equity bounce in 2009 if he does. As Tom Walker, manager of the £495m Martin Currie North American fund, puts it: “The political environment is certainly interesting but it’s overshadowed by the huge economic challenges facing the US. When credit and stock markets return to some form of normality and start focusing again on fundamentals, that will have a far greater impact on share prices than the signing in of the 44th US President.”

Stephen Wilmot is features writer at Investment Adviser