Do Markets Care Who Controls the White House, Congress?

Does the prevailing political party, Democratic or Republican, really make a difference to the stock market?

Print
https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Is stock market performance affected by controlling political party?
4 min read

It’s a familiar question, asked just about every election year: Does the stock market perform better under Democratic or Republican control of Washington?

Republicans might reminisce about the 1980s, when stocks galloped upward during Republican Ronald Reagan’s presidency. Democrats might point to the huge stock market rally of the 1990s under the presidency of Democrat Bill Clinton.

But the numbers tell a more complex story, and it involves Congress, too. History shows that the S&P 500 Index (SPX) has done best under Democratic presidents, but even better when Republicans control Congress. That said, it’s hard to prove that the market truly responds to who pulls the levers in Washington in the first place, or that either party can logically claim credit or be blamed for the market’s performance.

“Simply put, the comparability between historical administrations is so difficult that it renders a statistical analysis completely unreliable,” warns Devin Ekberg, CFA, Investools® Content Development Manager. (Investools is TD Ameritrade’s educational affiliate.)

Ekberg definitely has a point, but leaving that aside for the moment, what did past returns do?

What History Tells Us

Looking back to all the years since World War II ended in 1945, the average compound annual growth rate (CAGR) of the SPX under six Democratic presidents has been 9.7% and the rate under six Republican presidents has been 6.7%, according to S&P Global Market Intelligence.

The SPX hasn’t had a negative average CAGR during the administration of any Democratic president between Harry Truman and Barack Obama, and rose during four of six Republican administrations. However, the S&P’s average CAGR was negative under Republican presidents Richard Nixon and George W. Bush.

Does the market’s performance under a given president directly reflect that president’s policies? Or, put another way, can a president take credit for the market’s strong performance or be blamed for its weak performance? Not necessarily, says Sam Stovall, U.S. equity strategist at S&P Global.

“You could say return was pretty hefty … under Obama, but just as I wouldn’t give [Gerald] Ford credit for CAGR of 18% because we were emerging from 50% bear, I wouldn’t give Obama credit because we were emerging from a 57% bear and the Fed dropped rates,” Stovall said.

In other words, external factors like the condition of the market in the years before a president’s election and the Fed’s policies can have a big effect on stocks’ performance. And that’s often beyond the control of a president. 

It’s also important to put the SPX’s CAGR into context, because comparing results under different presidents is often like comparing apples to oranges. For example, the average CAGR was a robust 18.6% under Ford, but Ford served only a little over two years as president. In the administrations of recent two-term Republican presidents Dwight Eisenhower, Ronald Reagan, and George W. Bush, the SPX’s average CAGR was all over the map, rising 10.3% under Eisenhower, climbing 9.4% under Reagan, and then falling 4.6% under George W. Bush.

For Democratic two-term presidents, the best average CAGR came under Bill Clinton, with a rise of 14.9%, followed by Barack Obama at 12.4%.

Congressional Connection

Looking at the president alone, however, doesn’t tell the whole story. The average CAGR under Democratic presidents may have been stronger than under Republicans, but Republicans may take comfort from stocks’ performance in conjunction with Congress. Since 1945, there have been 16 years in which Republicans controlled the House and the Senate, and those 16 years saw average CAGR rise 13.4%, compared with 7.4% in the 44 years when both branches were controlled by Democrats.

“In some ways, here’s a perfect example that data can tell whatever story you want it to tell,” Stovall said. “If you want to make the case it’s better to have Democrats in government, well then look to the president. If you want to make Republicans look better, look to Congress.”

Keep in mind that with congressional data, there’s a time element. Republicans had control of both houses for less than half the years that Democrats did. Additionally, some of the times Republicans controlled both the House and Senate came under Democratic presidents Clinton and Obama.

Remember that Old Adage About Correlation

Ekberg warns that various data problems, including small sample size, make it even more difficult to compare how the market did under various political scenarios. And, like Stovall, he notes that fundamental factors unrelated to the president or party play a huge role in determining market performance.

“My issue on equating stock returns to U.S. presidential party is that it reduces the most complex financial system on earth to a single factor, and ignores far bigger multi-factor influences in stock returns like interest rates, macroeconomics, and currency regimes,” Ekberg said. “It also ignores timing differences between policy changes and their effects, which are most often variable and lagged, if they can be linked at all.”

A better analysis, Ekberg said, would be to forecast how specific policy decisions could affect certain segments of the market, and adjust future forecasts accordingly.

So what’s the takeaway? Perhaps that it can be fun to argue over which party helps the stock market more, as long as we keep in mind that old adage: “Correlation doesn’t imply causation.” No matter what the candidates and their supporters might say.

Read more about the upcoming election and its implications:

Call Us
800-454-9272

S&P Global Market Intelligence is separate from and not affiliated with TD Ameritrade, which is not responsible for their services or policies.

Investools, Inc. and TD Ameritrade, Inc., are separate but affiliated companies that are not responsible for each other’s services or policies. 

Investools® does not provide financial advice and is not in the business of transacting trades. 

*Investools® 7-day free trial is valid for new Investools clients only.  Offer is available through December 31, 2016.   New Investools clients are able to select a free 7-day trial for either the Stock Investing course or the Income Investing course.  Investools  reserves the right to restrict or revoke this offer at any time. This is not an offer or solicitation in any jurisdiction where Investools is not authorized to do business. A valid email address is required to participate.

Please allow 1 week from requesting the free trial to receive an email from Investools® with information on how to access your 7-day free trial. The 7-day trial includes access to either the Stock Investing or Income Investing online course, online and in-person workshops, one-to-one coaching, online coaching, Investor Toolbox®, and Trading Rooms®. After the 7-day trial ends, you must subscribe to maintain access.   Cost for the Stock Investing course for non-TD Ameritrade clients will be $699. Cost for the Stock Investing course for TD Ameritrade clients will be $499.  Cost for the Income Investing course for non-TD Ameritrade clients will be $2,199.  Cost for the Income Investing course for TD Ameritrade clients will be $1,549.

Neither Investools® nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. 

Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.


adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.

Scroll to Top