Every four years we talk about how this year’s Presidential election is the most important ever. Along the way, people make a whole host of sweeping statements about how picking their team will lead to all of the good things happening, but picking the other team will lead to all of the bad things happening (which is true by the way). And, true to form, everyone has already started telling stories about how voting for their candidate will inevitably lead the financial markets going up, and voting for the other guy will cause the economy to melt down (with varying degrees of reasonableness and coherence).
Rather than dealing with the specific arguments (and making one side or the other mad) – and also skipping over all of the absolutely true points about how the US economy is massively complicated and the President has very limited control over how things play out in the market – let’s look at the historical data. Is there anything there that can help us sort out whether a given Republican or Democratic candidate, is going to be better for the stock market? And how do elections impact the stock market?
I want to break this into two separate questions. First, what has happened in the stock market during Presidential election years compared to non-Presidential election years. Second, has the stock market acted differently based on whether a Republican or Democrat is President.
Before we dig into the data, it’s important to recognize that party is a pretty rough guide to how a president will govern. Is a Democrat today really the same as a Democrat from the 1920s? Or even more recently, was Trump the same as President Bush? The answer is pretty clearly no. But party identification does give us some sort of guide, however imperfect it might be.
The Markets and Election Years
So let’s get started: what has happened to the stock market during election years in the past? For the entirety of this analysis, we’ll be looking at the period from 1926 through 2022, and we’ll focus on the S&P 500 Index. During this period, we’ve had 23 Presidential Elections. To set our baseline, over this entire time period, the annual average return for the S&P 500 Index was 12.01%. During election years the S&P 500 only averaged a return of 11.57%, while during non-Presidential election years, the annual average return was 12.358%. So, it would seem like Presidential elections aren’t very good for the stock market – and this sort of makes sense. During election years there is a massive amount of uncertainty, which markets don’t tend to like very much, but that’s not the full story. What if we break it down even further and look at what happened during those elections?
With a Presidential election, there are really two possible outcomes (for our purposes at least): The Presidency can stay with the same party as the previous President, or the new President can be from the other party. This presents a much more interesting story than simply looking at election year versus non-election years. During election years where the Presidency stayed in the same party (either the President was reelected, or the new President was from the same party), the S&P 500 averaged an annual return of 16.00%, but when the Presidency switched parties, the annual average return was only 6.35%. So, what happened here?
It’s easy to tell a story about how the markets like continuity, and change is scary. But I would guess that the causation runs the other way – assuming there is any meaningful causation at all. It would seem more likely that the Presidency switched parties because the economy wasn’t particularly strong, rather than the Presidential campaign driving the market. While we’ve already stipulated that Presidents don’t have as much power over the economy as most people think they do, that doesn’t really matter in an election. If the voters think you have control over the economy, they will vote accordingly. In other words, what’s going on in the markets will tell you about the election, rather than the other way around.
Which Party is Better?
Moving on to our second question, does the market treat Republicans and Democrats differently? In a word, “maybe.” But let’s expand on that. Let’s start with a pretty straightforward question: What were stock returns like when Republicans were President versus when Democrats were President?
From 1926 to 2022, we have had a Republican president for 47 years, and a Democratic president for 50 years. The difference in returns between the parties is pretty stark. The average annual return for the S&P 500 index when we had a Republican President was 9.32%. When we had a Democratic President, the S&P 500 average 15.22% per year. That’s a premium of 5.9% per year on average. To put it mildly, this is a really big difference.
This is obviously not deterministic though. When we break the returns down by specific Presidential tenures, Calvin Coolidge (a Republican) actually comes out with the best returns by an absolutely massive margin. Coolidge was President from August 1923 to February 1929. Though we only have stock returns starting in January 1926, we see that during that period, the annual average return of the S&P 500 Index was 30.57%. The next closest was Ford (Republican, 8/74 – 12/76) at 18.44%. And then coming in third was Clinton (Democrat, 1/93 – 12/00) at 17.20% per year. On the other hand, the Republicans also had Herbert Hoover (3/29 – 2/33) who presided over the start of the Great Depression and ended up with an annual average return of -27.19%. While it’s fun to pick out eye popping numbers, each presidency is going to have it’s own specific challenges and situations. And again, the President has significantly less control over the markets than most people assume. To a very large degree, the markets are going to do what they’re going to do.
But let’s start taking a look at a couple things going on here. Normally, the first objection that usually gets raised to the Democratic President market premium is that we need to look at Congress as well as the presidency. I actually did a reasonably deep dive on this question four years ago during the last Presidential election. The short answer is that who controls Congress doesn’t seem to have any significant effect on the stock market – at least on it’s own. Whether Democrats or Republicans control Congress just doesn’t give you much information on what the markets will do. But when you consider Congressional control along with the presidency, there’s something interesting that pops out of the data.
Does the market like gridlock?
If we reframe the question in terms of unified and divided government, we can see a more complicated story. Conveniently, over the period we’re looking at from 1926 to 2022, you had an almost equal number of years of unified government (where the same party is controlled the presidency and both houses of Congress) and divided government – we have had 48 years of unified government and 49 years of divided government. During periods of divided government, the S&P 500 averaged 9.64% per year, but during periods of unified government, the annual average return was 14.44% for the S&P 500. That’s a premium of almost 5% per year when one party has run the table – nearly as large as the premium we saw for Democratic Presidents.
But what if we bring party back into the mix? After all, of the 48 years that we’ve had a unified government, the Democrats have been in charge for 36 of them. Could this premium for unified government be what’s driving the Democratic Presidential premium that we saw earlier?
Let’s break the numbers down a little bit. We want to know four things: how the markets have done with Republican unified government, how they have done with Democratic unified government, and how they have done with divided government with Presidents of both parties. So let’s look at the numbers.
|Situation||Number of Years||S&P 500 Index Annual Average Return|
|Unified Republican||13 years||14.52%|
|Unified Democrat||36 years||14.01%|
|Divided with Republican President||34 years||7.33%|
|Divided with Democratic President||14 years||15.94%|
Data from 1926 through 2022. Unified government means that the Presidency, the House of Representatives and the Senate are all controlled by a single party. Divided government means that at least one houses of Congress or the Presidency is controlled by the other party. Indexes are not available for direct investment. For educational purposes only.
The first thing to notice is that there is not that much of a difference between the historical average returns between unified Republican and Democratic administrations. Given how much the markets bounce around, we can’t tell whether this difference is from random chance or something real.
The interesting story is what happens in divided government – there’s a pretty big split here. The market has done significantly better with Democratic divided government (meaning that the President was a Democrat, and the Republicans controlled at least one house of Congress) than with Republican divided government. In fact, the premium, averaging nearly 8.6% per year, is by far the biggest premium we’ve looked at so far.
But what’s even more interesting is that divided government with a Democratic President did even better than when there was a unified government.
As interesting as all of this is, what does it actually tell us?
What Should You do with this Information?
We’ve run all sorts of numbers and dived into a bunch of rabbit holes (and there are a lot more that we could have gone down). But how useful are all of these numbers?
Based on the numbers that we have run, and assuming the stock market was your only guide, should you be rooting for a Democratic President and the Republicans holding at least one of the Houses of Congress? While this would make my spreadsheets cleaner since we have never had a period where there was a Democratic President and House with a Republican Senate, I don’t know that you can make that leap.
The reason for this is simple. The US Presidential election is probably the most watched event in the world. It really is no exaggeration to say that the US President is the single most powerful person in the world, so the entirety of the world is watching what’s going on. And this very much includes the financial markets. Every statement and action is constantly picked apart and looked at from every different angle.
The market knows everything that we’ve talked about here. None of the numbers that I’ve run are novel in the slightest. All of this information, and all of the information in the rabbit holes that we didn’t go down, is in market prices already. The markets (or at least the people that make up the financial markets) know that stock prices went up when Democratic Presidents were in office more than they did when Republican Presidents were in office, as well as all of the various permutations that I could have run. That’s all baked in at this point.
For some things like the equity or the size factor, that’s not a problem. These types of factors are compensation for taking fundamental risks. Owning a stock is riskier than owning a bond, so all things being equal, the price of a stock needs to be lower for the same expected cash flows to induce you to buy the stock instead of the bond. Put another way, you need a higher expected return on the stock to make up for the additional risk.
Which political party controls which pieces of government is not a priced risk like equity or size risk. The fact that Democratic Presidents have had better stock returns than Republican Presidents does not imply that electing Democratic Presidents is riskier. The way to interpret these results is simply that Democratic Presidents have presided over periods when the world has done better relative to expectations than the world did when Republican Presidents were in office. You can spin that statement however you would like.
The real question is what this means going forward. Will this pattern persist into the future? This is the question that we always need to be asking whenever we look at any sort of outperformance, no matter the source. Unfortunately, we have no way of predicting whether the pattern will continue or not. Besides the fact that we can’t predict the future, the markets are never sitting still. They are constantly churning and updating their expectations about the future with new information. Including the fact that Democratic Presidents have done better than the market expected (at least in terms of stock returns).
All of this is just a long way of saying that you shouldn’t be basing your investment decisions on who the President happens to be (or who controls which house of Congress). You want to focus on the long-term, and stick with the asset allocation that you have built around your specific risk preferences and retirement income situation. In the context of the markets, how the President affects prices is just noise.