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In case you have been living under a rock, the election day is fast approaching on November 8th. I can only assume that most of us will be relieved when this election cycle is over. Maybe I’m too young to fully remember, but it seems like the political battles are becoming nastier and nastier and the tone of the candidates, more vitriolic by the day. In terms of the economy, I hear different people touting different scenarios with each candidate. Through this process, I became increasingly curious as to whether the stock market would react particularly favorably if a Democrat or a Republican took office.
Democrats vs. Republicans
If you google “Democrat vs. Republican Stock Market”, there are 501,000 results. Interestingly enough, if you google “Republican vs. Democrats Stock Market”, there are 457,000. I don’t know if more investors are Democrats, but I thought this little tidbit was interesting. Anyway, through my research, I was able to find this awesome chart by Forbes providing the breakdown of each President since 1929.
As you can see, a Democratic President has a 9% edge in comparing the S&P 500 Annualized Return during the 4-year term. While researching, I stumbled across a paper by the Federal Reserve in 2004. It included a Democratic President outpacing a Republican President with small cap stocks by 16% for the same time period.
On top of that, the only time two consecutive 4-year periods of negative returns occurred was under a Republican President (GW Bush). A Democratic President remarkably has never presided over more than one 4-year period of negative returns.
It’s also incredibly interesting that George W. Bush’s Great Recession only yielded a negative 7% annualized return, compared to FDR’s. I wasn’t even aware that the US went into a recession until seeing the annualized return of -12% on the chart above.
Before the S&P 500
One thing to note though is that the chart above only provides data since the S&P 500 Index launched. During the Presidencies of Harding and Coolidge (1921-1928), both Republicans, the Dow Jones INCREASED by 320%. In comparison, under the Hoover Administration (Republican), it decreased by 80%.
So given the information above, it would seem obvious to vote for a Democrat to see your stock portfolio increase. No-brainer, right? As Lee Corso likes to say, Not so fast my friend.
No Conclusive Evidence?
The paper I referenced above states that there is indeed no conclusive evidence that the President’s party has any statistically significant impact on U.S. stock market.
If you think about it for a minute though, it makes sense because the stock market is not influenced solely by the President. As we become more of a global economy, each day we are influenced by a variety of factors such as business cycles, monetary policy, wars and other countries’ economies. Did you know that the S&P 500 generates more than 50% of revenues outside the U.S.? Check out this chart by Steve Goldstein.
The stock market is a complex system in which cause and effect are not easy to figure out. Believe me, if a President and his or her economic team could figure this out, I think most American citizens would vote this party to stay in power forever. So, I believe all this data is pointing to correlation but not causation.
Take a look at this final chart. It shows when the market bottomed during each Presidential term.
Based on the data, you can see the market seems to bottom out close the the 2nd year of the President’s term. For those individuals who try to time the stock market (I’m definitely not one of them), the data suggests it will be mid-October 2018 when it will be optimal to buy at the bottom of the stock market.
As an average investor, I will not be making any adjustments to my portfolio based purely on the election results. Instead, I will be focusing on things that I can control such as my savings rate, investing in excellent companies, and ignoring the bluster in DC.
Will you adjust your portfolio based on the candidate elected? Share your thoughts below.