Typically, Republicans represent the free-market concept, while Democrats often represent regulation of the economy (1). These philosophies are at odds as the 2020 election nears, and many financial advisors and their clients are anxiously concerning themselves with the impact of the upcoming election on the market. It is important to remember that no two markets are the same and past performance is not an indication of future results, but history has some fascinating facts that may shed some light on this topic.
Many Republicans believe the economy is in much better shape when their party is in the Oval Office, and Democrats believe the same (1). The S&P 500 has returned more than 50% since President Trump was elected – a number more than double the average market return of presidents three years into their term (2). However, in presidencies prior to Trump’s, the market returns would suggest Democrats had a record of better overall stock market performance, shown in this data from the S&P 500 in presidencies since Herbert Hoover (3) (see Graph 1A).
From the table of total returns for the S&P 500 during presidencies since 1929, it is clear that average annual stock market gains are higher when Democrats hold the office. Implying that the stock market performed better because Democrats were presidents, however, implying that correlation equals causation, overlooks several other factors that influence the economy outside the White House. These factors include recessions, economic growth, the decisions of the Federal Reserve, trends in global trade, the prices of commodities such as crude oil, and the outbreak of violent conflict around the world, as well as many others.
Trump has seen strong overall market returns during his presidency. The S&P 500 is up 51.32% from Trump’s inauguration to the market close in data collected on December 31, 2019. Reagan’s net return was 94.81% and George W. Bush’s was -32.92% for their eight-year presidencies, while George H.W Bush’s was 72.27% over four years. Obama’s S&P return was 156.44% and Clinton’s was 180.83% for their eight-year presidencies (all percentages are given as Total Returns).
An often-overlooked factor influencing the performance of the economy is the Legislative Branch. Along with Democratic presidents, the evidence favors Republican Senates for economic growth. A sample of the S&P 500’s average annual return between 1957 and 2017 suggests that there is an excellent correlation between Republican control of the Senate and the performance of the S&P 500 (4) (See Graph 1B below). The difference between a Democratic House and a Republican House is less extreme. The worst correlation is between Republican presidents and Democratic Senates. The best correlation is between Democratic presidents and Republican Senates.
As election season heats up, when making adjustments to your portfolio, the average investor should think twice about adjustments purely in response to election results (3). Past events are not an indication of future trends. It is better to consider a long-term outlook rather than a four-or-eight year plan when picking an investment strategy.