The most common question I currently hear concerns the possible effects of the upcoming election on investment returns and the economy. If we knew who the winner would be this November, would we be able to predict future investment returns? Many Democrats are worried about a stock market crash if former President Trump wins; many Republicans are worried about a market crash if President Biden wins.
Forecasting is difficult so let’s examine historical data.
Bespoke Investment Group recently published a study on “Investing and Politics.” It was distributed by AMG Funds. The study discussed the relationship between which party occupied the White House and investment returns.
Some of the questions examined included:
- Were investment returns higher when a Democrat or a Republican occupied the White House ?
- Was there a relationship between a President’s approval rating and stock market returns?
- Do positive stock market returns before a Presidential election benefit incumbent Presidents?
- Did it make sense to only invest in stocks when a Democrat or Republican was President?
Were investment returns higher when a Democrat or a Republican occupied the White House ?
Bespoke found no clear relationship between which party won the Presidency and subsequent stock market returns. Specifically, the average annual return of the Dow Jones Industrial Average since 1901 was no different during Republican and Democratic Presidencies. Both averaged 6.6% per year. These results were similar to the other studies I have seen.
There was a wide spread of returns for different Presidents but no direct relationship to political party. The worst returns were during the administration of Herbert Hoover, -29% per year. The second worst returns were during the Nixon administration. There were also negative returns during the administrations of Democrats Woodrow Wilson and Jimmy Carter and Republicans Richard Nixon and George W. Bush.
The best returns were during the administration of Republican Calvin Coolidge. Bring back Calvin Coolidge! Or not. Coolidge is only ranked 34 out of 45 U.S. Presidents by the 2024 Presidential Greatness Project Expert Survey. So, not a great President but he was great for stock market returns.
Since World War II, the best returns were during the Clinton Administration, 16% per year. Eisenhower, Ford, Reagan, George H.W. Bush, Trump and Biden were in the 10-11% range.
Was there a relationship between a President’s approval rating and stock market returns?
Bespoke concluded that “…going back to the Truman administration, there has been little correlation between approval ratings and S&P 500 returns both over the trailing 12-month and forward 12-month periods.”
The surprising part is that the previous 12-month returns did not affect the President’s approval rating. What is not surprising is that the President’s approval rating did not affect future market returns.
Do market returns before a Presidential election benefit incumbent Presidents?
Since 1900, incumbent Presidents won 52% of the time when the Dow increased and lost 13% of the time when the Dow decreased during the 12-months before an election. However, the incumbent lost 29% of the time when the Dow increased
This is not a strong result. If the market continues to increase during 2024 that will be a positive for President Biden but it does not mean he will be elected.
Did it make sense to only invest in stocks when a Democrat or Republican was President?
Finally, Bespoke looked at whether it would have been more profitable to only invest when there was a Republican or Democratic President. The study showed that it was almost twice as profitable to only invest when Democrats occupied the White House. However, staying invested no matter which party won the Presidency was by far the most profitable strategy. About 27 to 53 times as profitable
Conclusion
Bespoke’s study is based upon historical data and past performance is no guarantee of future performance. But the complexity, substantial number of variables and the influence of Federal Reserve make it difficult to pick one variable (party in power) and find it significant.
The lack of a relationship between the President’s party and stock market returns is not surprising. There is not enough consistent data to yield a statistically strong conclusion. There have only been fifty-eight presidential elections and they occurred during different circumstances (wartime and peacetime; with and without an incumbent; 1800s, 1900s or the 2000s; etc.). A small sample size combined with inconsistent data makes it difficult to show a correlation. And only considering Presidential administrations ignores whether the President’s party controlled one or both legislative branches.
What the study does indicate, is that the most important strategy for long-term investors in well diversified portfolios is to stay invested. And staying invested is what we help our clients do.
Disclaimers:
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice. For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.
Keep in mind that:
- Past performance is no guarantee of future performance;
- Investments involve the risk of loss of principal and earnings;
- ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
- “Average annual return” evens out variations in the actual year-to-year returns.
- ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
- None of the information provided is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and you should not assume that these generalizations or information apply to you.
- Investments mentioned may not be suitable for all investors.
- An investment cannot be made directly into an index.