Political Parties and Stock Markets since 1900
Should Stock Market Investors Prefer a Unified or Divided Washington?
Does the party in the White House significantly impact U.S. stock markets and economic performance? And if so, how does the party controlling Congress influence market outcomes?
While history provides interesting insights, it is crucial to remember that past performance is no guarantee of future results. This is especially relevant in 2020, as the COVID-19 pandemic has introduced unprecedented uncertainty into the election landscape.
2020: From Bull Market to Bear Market and Back Again
In just six months, U.S. markets experienced a dramatic cycle from a bull market to a bear market and back again.
The S&P 500 peaked on February 19th at 3,386 before plummeting by 33.9% by March 23rd.
By August 18th, the index had fully recovered, surpassing its previous peak, signaling a new bull market.
While these technical definitions hold, many investors still feel the effects of a bear market or recession, particularly due to high unemployment rates and ongoing economic uncertainty caused by COVID-19.
Will 2020 Break a 70-Year Trend?
Historically, an incumbent president faces difficulty winning reelection under two specific conditions:
A 20% market decline in an election year.
A recession during an election year.
According to Ned Davis Research, since 1900, when one of these conditions was met, the incumbent party won only 5 times but lost 9 times. The last incumbent to win under these conditions was Harry Truman in 1948—almost 70 years ago.
In 2020, both conditions occurred. The market dropped over 20% and the U.S. entered a recession. However, past trends do not guarantee future results, and 2020 remains an exceptionally unpredictable year.
Republicans vs. Democrats: Which Party Performs Better?
Stock Market Returns by Presidential Party
According to Ned Davis Research, when adjusted for inflation, the Dow Jones Industrial Average (DJIA) has gained:
3.8% per year under Democratic presidents.
1.1% per year under Republican presidents.
Stock Market Returns by Congressional Control
Examining Congressional control, historical data shows:
Republican-controlled White House & Congress: 7.09% average annual return.
Democratic-controlled White House & Congress: 2.96% average annual return.
Key Factors to Consider
While statistics suggest stock markets perform better under Democratic presidents, several caveats must be considered:
Economic cycles and luck play a role, but Democratic administrations have governed through booms, downturns, and stagnation, suggesting other influences are at play.
Policy effects often lag by a year or two, meaning a president’s economic impact may not be fully visible until midterm elections shift Congressional control.
A president’s influence is limited. Stock markets respond to a complex web of factors, including Congress, global economies, monetary policy, military affairs, and the Federal Reserve.
Ultimately, while historical trends offer valuable context, they should not dictate investment decisions. Markets are unpredictable, and no single party or president can fully control economic outcomes.