To Boost Stocks, Vote Democrat . . . Or Republican

2/8/2016


In this presidential election year, investors read the tea leaves as to who will be elected this November and how the new commander in chief will affect stocks.

Quite frankly, you're probably better off drinking the tea than reading the leaves — which party controls the White House seems to make little difference to stocks.

Democrats claim the stock market has performed better during their administrations, and statistics back them up:

• According to Sam Stovall of S&P Capital IQ, since 1945 stocks averaged annual gains of 9.7% under a Democratic president, versus 6.7% for Republicans.

• In a study published last year in the Universal Journal of Accounting and Finance, Michael Long of Rutgers University looked at presidential data from 1929 through 2012. He said that when Democrats held the White House, the overall market return premium (the return of stocks minus the risk-free rate) was 10.83%, versus negative 1.2% under Republican presidents.

Of course, Republicans can cite their own statistics that show stocks love the GOP:

• Many of these studies that show better returns during Democratic presidencies reflect calendar years and don't take into account what the market does immediately following the election. In a 2014 research paper in the Journal Of Business and Economics Research, researchers reported that, since 1900, the stock market declined in the month following the election nine of the 14  times a Democrat won, versus only four of 15 times when a Republican won. The one-month returns for Republicans averaged 2.3%, versus average declines of 1.7% after Democrats won.

• Bespoke Investment looked at market returns from election day to the end of the year. They found that when a Democrat won, stocks lost an average of 1%, while they rose 4% if a Republican won.

• Based on inflation-adjusted stock returns since 1857, Brian Jacobsen of Wells Fargo Asset Management found the market performed slightly better under Republican presidents — 8.6% per year for the GOP, versus 8.3% per year under Democrats.

Don't put too much stock in forecasts that rely on presidential data. Not only have studies yielded mixed results, but they draw on a tiny sample set. Since 1857, the U.S. has held only 39 presidential elections. Divining information from such a small data set leads to big errors, including the whopper of all statistical trapdoors — correlation versus causation.

Did the market rise or fall because of the party in the Oval Office? Or should we blame bad luck or timing? Consider the popular Super Bowl indicator, which says if an NFC team wins, the market will rise. This indicator has "called" the market correctly in each of the last seven years and 40 out of 49 years. The correlation is strong, but does that imply causation? Does the stock market really care who wins the Super Bowl? Of course not. And it may care little more about who sits in the White House.

Some argue that the presidency matters less than who controls Congress. After all, Congress controls the purse strings, taxes, regulations, and a host of matters that impact business and investment conditions. However, analysis of stock returns based on congressional power yields inconclusive data. S&P Capital IQ's Stovall says that since World War II, the strongest markets have occurred with a Republican president and a Republican-controlled Congress, followed closely by a Democratic president facing a split or Republican-controlled Congress. However, Jacobsen's data going back to 1857 shows that a Democrat in the Oval Office and a split Congress has led to the highest inflation-­adjusted annual return, followed closely by a Republican president and Republican Congress.

This analysis also involves small data sets. For example, a Democratic president faced a split Congress in just 12 of the 157 years since 1857.

Even if the broad market doesn't care who controls the White House or Congress, surely it matters at the sector level, right? Maybe, maybe not. For example, conventional wisdom says Democrats should be good for health-care stocks, since they hope to bring more people into the health-care system, thus expanding the market. Yet hardly a day goes by when a Democrat (or a Republican) fails to take a pot-shot at drug companies or health insurers.

Betting on a particular sector based on who wins and loses the election assumes major differences between the two parties. Plenty of research suggests the market doesn't acknowledge those differences.

Bottom line: Building an investment program around who you think will win in November isn't the best way to invest. History shows the market tends to move higher regardless of who controls the White House or Congress, and to take chips off the table because you believe a particular candidate is "bad" for stocks has typically been a mistake.


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