As we enter the last eight weeks of the Presidential campaign, be prepared to hear media pundits make all kinds of assertions about whether a President Trump or Clinton, Republican or Democrat, would be better for the stock market. Our historical research suggests that who is President, and from which party, has less impact on your portfolio than is often assumed. What’s important, I believe, is to prevent your political biases and emotions from interfering with your investment decisions. Before discussing our presidential-term research, let’s remind ourselves of one behavioral trait of homo sapiens.
Since time immemorial, humans have been wired to look for patterns that don’t necessarily exist (i.e., illusory pattern recognition) to help tell a story and prognosticate the (uncertain) future. For instance, the ancient Chinese sought to divine the future by analyzing cracks in ox bones and turtle shells; the ancient Greeks preferred pyromancy, divination based on observing the shapes of flames. As Daniel Kahneman, psychologist and Nobel Laureate, writes in Thinking, Fast and Slow: “We are pattern seekers, believers in a coherent world, in which regularities appear not by accident but as a result of mechanical causality or someone’s intention…when we detect what appears to be a rule, we quickly reject the idea that the process is truly random.” Alas, investors, too, are quite prone to search for patterns where they don’t exist.
The President and the Market: Is There a Connection?
I am not saying that who is President is unimportant for the economy and the markets; but there are many other market-moving factors at work both at home and abroad over which he or she exercises little or no control—oil prices, interest rates, technological breakthroughs, innovation, entrepreneurism, wars, terrorism, climate change. Besides, the four-year election cycle calendar is a somewhat artificial time period. For instance, regardless of what one thinks of George W. Bush’s presidency, it’s hard to blame him for inheriting in 2001 a stock market crash (on the heels of an epic stock bubble) that began in March 2000; and the fact that his second term ended less than two months before a powerful market recovery (following the 2008 financial crisis) commenced in March 2009 seems somewhat coincidental.
Let’s now look at the results of our study. Exhibit 1 reports the market returns during four-year presidential terms of office from January 1, 1949 to June 15, 2016. These 17 terms of office included nine Republican Presidents and eight Democrats. The average annualized market return during the four-year cycles was 14.9% for Democratic Presidents and 8.5% for Republicans. We also performed the same exercise from January 1, 1876 to June 15, 2016, 19 Republican Presidential terms and 16 Democratic, and calculated a 10% annualized return for Democratic Presidents and 6.6% for Republicans (the pre-1926 market data are less robust, and we can see that pre-World War II presidential cycle performance was heavily influenced by just two outliers—the market collapse with the onset of the Great Depression during Herbert Hoover’s ill-fated term and the dramatic but temporary rebound during Franklin Roosevelt’s first term in office).
Although the gap between 14.9% and 8.5% annualized may sound noteworthy, I don’t consider it to be statistically significant due to a small sample size of just 17 data points (terms in office) with somewhat arbitrary starting and ending dates (keep in mind that Presidential terms don’t begin until after January inauguration). Also, the S&P 500 Index has risen in about 2/3 of years since 1926, regardless of who’s residing in the White House. It also seems to me that there should be an echo, or momentum, carrying over from the prior administration, just as corporations should thrive for a while after great CEOs ride off into the sunset.
Searching for Patterns
Incidentally, what we conclude from research into presidential cycles and markets rhymes with previous political studies we have conducted. For instance, after the November 2010 midterm election produced a change in control over the House of Representatives (Republicans took over), our historical study concluded that which party controls the House has had virtually no correlation with equity market performance (see, “How Will the Election Results Affect Your Portfolio?“). In a like vein, every new administration, for better or worse, seems to seek to reopen the tax code and fiddle with tax rates. Our research last year (“Politics, Tax Rates and the Stock Market“) found a negligible relationship between shifting tax rates and short-term market performance.
In sum, I see no real evidence that a Democratic or Republican President is “better” for Wall Street: stocks tend to rise over time regardless of who occupies the White House. Emotions do seem to be running particularly high during this presidential campaign season, which is why I would caution investors against allowing political biases or emotions to cause them to engage in politically inspired market timing, thus deviating from well-thought out, long-term investment portfolios and strategies. Instead, concentrate on that over which you can exert control—appropriate long-term asset allocations; investment costs; and systematic, disciplined portfolio rebalancing and tax management.
