Nima

Director of Client Relationships Responsible for the management & development of the easyMarkets client base as well the development of our IB partner program.

With less than a year until the 2016 presidential elections, investors are looking on nervously at the Republican and Democratic primaries for clues about who might become the next leader of the world’s largest economy. The uncertainty surrounding next year’s election extends beyond just the political sphere and into the economy and financial markets. This has many traders asking, which party is better for the stock market?

Democratic and Republican Primaries

Before we look at the historical data to determine whether the stock market performs better under a Democratic or Republican president, a quick recap of the presidential primaries is in order.

For the ruling Democrats, a clear two-horse race has emerged between Hillary Clinton and Bernie Sanders. According to the latest Rasmussen Reports national telephone survey, 46% of Likely Democratic Voters would vote for Clinton. While still a distant second at 30%, Bernie Sanders has advanced in the polls over the past five weeks. Based on an average of ten separate polls, Clinton holds a 24.3 percentage point lead over Sanders, according to Real Clear Politics.[2]

For the Republicans, real estate mogul Donald Trump continues to lead with 39% support, more than twice that of Texas Senator Ted Cruz.[3] Trump enjoys a strong lead in eight separate polls with average support of 35.1% among Likely Republican Voters, according to Real Clear Politics. Florida Senator Marco Rubio and retired neurosurgeon Ben Carson are a distant third and fourth, respectively.[4]

Markets may Perform Better under Democrats

Contrary to some’s expectations, stock market returns are higher under Democrats than Republicans with the average annual return under Democratic presidents since 1900 being 15.31%, compared with just 5.43% under Republicans. The average monthly return under Democrats was 0.73% versus 0.38% for Republicans. This comes despite the Republicans spending more time in office over the 112-year period (734 months versus 617 months for Democrats).[5]

Additionally, two of the top-three presidents with the highest return were Democrats – Bill Clinton (226.75% return) and Franklin Roosevelt (201.96% return). However, the president with the highest return was Republican Calvin Coolidge, whose 67-month reign yielded a total return of 268.60%. The Coolidge administration had by far the highest average annual return at 48.11%.[6]

Analysts at Bespoke Investment Group recently confirmed these findings in its 2016 outlook:

“With such strong returns so far during President Obama’s tenure, the issue of which party is better for the stock market is less and less debatable. As we have noted in prior Bespoke Reports, in both of his election campaigns, there was a widespread view that President Obama and Democrats in general would be bad for the stock market. Yet, here we are seven years later looking at a gain of nearly 125% for the DJIA since President Obama took office. There really shouldn’t be any debate; on a historical basis, Democratic presidents are better for the stock market. The saying that Republican Presidents are better than Democrats for investors continues to be one of the bigger misconceptions there is in the investment world.”[7]

President Obama back in June was quick to point out his administration’s success in rejuvenating the economy.

“I can answer unequivocally, ‘Are you better off now than you were four years ago?” Obama said on comedian Marc Maron’s podcast, WTF. “And the answer is on just about every economic measure, you are.”[8]

Clearly the question was rhetorical.

Hold on a second: Does presidential affiliation really affect the markets?

Not everyone is impressed by the simplistic analysis presented above. According to Blackrock mutual fund manager Russ Koesterich, studies referencing average annual returns under Democratic and Republican presidents don’t include dividends. Additionally, when you adjust those averages for volatility, the numbers are statistically equivalent. This suggests that party affiliation of the president really has no consistent, predictable influence on the equities market.[9]

It’s also important to remember that presidents spend a substantial amount of time dealing with policy decisions made by previous administrations, making it difficult to attribute the success of any one part of the economy to one administration. Obama’s eight-year term is a clear example of this.[10]

The Obama administration assumed office during the worst economic and financial crisis since the Great Depression. By the time Obama had wrapped up his first economic quarter as president, the stock market had already bottomed. As they often say, the only way was up at that point. Since bottoming out at 676.53 on March 9, 2009, the S&P 500 Index has rallied more than 200%.

At the same time, only two US presidents since 1945 saw negative market returns during their time in office. The first was the embattled Richard Nixon, who served between 1969 and 1974. His tenure was marked by the Arab oil embargo in 1973 and the Watergate scandal in 1974. The second was George W. Bush, whose final year in office was during the 2008 financial crisis.[11]

Bottom Line

That the stock markets have performed better under Democrats than Republicans isn’t debatable. What is debatable are the reasons. Given the growing complexity of the financial markets and the broader economic and financial climate that presidents inherit, it’s difficult to attribute the success or failure of the stock market to party affiliation. While we can’t say for sure what 2016 will bring, all indications seem to indicate a bumpy ride. The ride could get bumpier in the first half of 2016 as the primaries get underway.

 

[1] Rasmussen Reports (December 22, 2015). Clinton Loses Ground in Democratic Primary Race.

[2] Real Clear Politics. 2016 Democratic Presidential Nomination.

[3] Michael Mathes (December 23, 2015). “Trump laps Republican field in latest 2016 poll.” Yahoo! News.

[4] Real Clear Politics. 2016 Republican Presidential Nomination.

[5] CNN Money (October 28, 2015). “Democrats vs. Republicans: Who’s better for stocks?”

[6] CMC Markets (October 28, 2015). “Democrats vs. Republicans: Who’s better for stocks?”

[7] Myles Udland (December 20, 2015). “The stock market loves Democratic presidents more than Republicans.” Business Insider.

[8] Jay Yarow (June 25, 2015). “Obama: I saved the stock market.” Business insider.

[9] Russ Koesterich (August 3, 2012). “Mythbusting: How Presidential Elections Affect Markets.” Seeking Alpha.

[10] Myles Udland (December 20, 2015). “The stock market loves Democratic presidents more than Republicans.” Business Insider.

[11] Elena Holodny (December 1, 2015). “Only 2 presidents since 1945 experienced negative market returns during their time in office.” Business Insider.

Was this article helpful?

0 0 0