As we enter into an election year, you are probably hearing predictions about what the stock market will or won’t do based on what happens in November. Don’t believe everything you hear. Let’s look at some facts…
Since 1926, Republicans and Democrats have each controlled the White House roughly the same number of years — Democrats 46, Republicans 43. The U.S. stock market (measured by the S&P 500 index) averaged an annual return of 15.3% when a Democratic president was in office compared to 8.6% when a Republican president was in office.
But if you think that voting for a Democrat will automatically improve your returns, let’s take a deeper look into this data.
Source: Morningstar Direct November 2015. U.S. stock market return represented by the S&P 500 index. Past performance is not indicative of future results. All investments involve risk including loss of principal. Indexes are unmanaged baskets of securities in which investors cannot directly invest.
First, given the limited amount of data, we can’t say with any certainty that Democratic presidents deliver better U.S. stock market performance than Republican presidents.
Second, chance may also play a large part in the results. Eight of the 10 worst one-year returns occurred when a Republican president occupied the office. Is that the result of bad governance or just bad luck? If we assume it was just bad luck and remove the 10 worst returns, the average for Democratic presidents moves up to 17.0% and the average for Republican presidents leaps to 16.0%.
Third, these are simple annual returns. In reality, the election decision is known the previous November, and often there is a frontrunner much earlier, causing markets to price in expectations before the next president takes office.
In addition, many policies take time to seep through the economy. Policy changes made today may not produce tangible results for many years. And all presidents take office under the economic conditions, good or bad, of their predecessors.
Lastly, in our tripartite system of government, with all its check and balances on power, presidents generally have a limited ability to influence markets or the economy. It is Congress that is directly responsible for budgets and spending. And Congress itself has often been divided. Since 1945, there have only been 13 years when both chambers of Congress were controlled by the same party.
When it comes to presidents, political parties and U.S. stock market returns, it’s difficult to determine any meaningful patterns.
When it comes to investors, those who have fared best may have been those who stayed invested and didn’t make changes to their portfolio based on election results.