A topic du jour for political posturing is…you guessed it…the economy! Both parties try to persuade voters that their policies are better for the economy and the markets, so we decided to take a closer look at how the economy and stock market have performed under different kinds of leadership.
As you review some of the findings below, please keep in mind we do not favor one party over the other—our primary goal is to help our clients reach their long-term goals, and how we view politics personally should not (and does not) play a role in the investment plans we create and manage. Also, the findings below should not set any kind of expectation for future returns depending on who wins. If anything, you should view the findings below as little more than ‘interesting cocktail party facts!’
So…Republicans or Democrats – Who’s Better for the Economy?
Two Princeton economists performed some comprehensive research on the matter, in a paper titled “Presidents and the U.S. Economy: An Econometric Exploration.” For all of the interesting discoveries they make in the process, perhaps the biggest takeaway is that political party doesn’t seem to matter all that much The economy and stocks tend to perform better when a Democrat is in power, but Messrs. Blinder and Watson make it clear in their paper that gaining an edge in economic and stock market performance is more arbitrary than policy related: “It appears that the Democratic edge stems mainly from more benign oil shocks, superior [productivity] performance, and perhaps greater defense spending and faster growth abroad.”
The analysis looked at a 64-year period starting with President Harry Truman and ending with President Barack Obama, which includes seven complete Democratic terms and nine Republican ones. Some findings:
- Gross Domestic Product (GDP) – edge: Democrats – the study found that GDP rose at an average rate of 4.33% under Democratic presidents versus 2.54% for Republicans.
- Unemployment – edge: Democrats – the average unemployment rate was 5.64% under Democrats versus 6.01% under Republican presidents, a difference Messrs. Blinder and Watson refer to as “small and not statistically significant.”
- Chance of Recession – edge: Democrats – Republicans spent more time in the White House during the period studied (144 quarters versus 112 for Democrats), so their sample size is larger. But in 41 of the 49 quarters defined as “recession” by the National Bureau of Economic Research during the period of the study, Republicans were in the White House.1
- S&P 500 Performance – edge: Democrats – this data actually comes from a different study, performed by Sam Stovall, chief equity strategist at S&P Capital IQ. He found that since 1945, the average annual gain for the market has been +9.7% under Democrats versus +6.7% for Republicans. However, the best stock market performance under any president since 1945 happened under Republican Gerald Ford, who was in office when the S&P 500 annualized +18.6% from August 1974 – January 1977.2
You Need More than Election Stats to Create an Investment PlanThe aforementioned studies and findings are interesting to be sure, but investors should not look to them alone when formulating a market outlook. Other factors like corporate earnings, global GDP growth, inflation, interest rates and a myriad of other considerations are equally—if not more—important. Your investment objectives and risk tolerance also matter more for your portfolio than who ends up in the White House. We’d encourage investors to remember that as the election cycle heats up from here.
If you’d like to review some of the many factors to consider when formulating your investment plan, give one of our Wealth Managers a call at 1-800-541-7774 or feel free to contact us here anytime.