Does Who Wins in November Make a Difference in Your Portfolio? - Rodgers & Associates

Does Who Wins in November Make a Difference in Your Portfolio?

History suggests it does not.

One of the common senti­ments I hear these days is: I’m really worried what’s going to happen to the markets if ______ gets elected in November (fill in either Biden or Trump, as I hear both equally). There are legit­imate arguments on both sides. As the argument goes, a Biden victory could lead to a repeal of the Trump tax cuts and other aspects of his more “pro-business” agenda, which could mute future stock market returns. On the other hand, re-electing Trump could lead to additional trade disputes (mainly with China) and more global uncer­tainty over the United States’ role in the world, which could weigh down markets. These are the talking points we are used to hearing, but what does history tell us about how politics influ­ences the market?

If we just compare stock market perfor­mance during presi­dencies from different political parties since WWII, we find that Democrats have the advantage. On average, the markets have had an annual return of 15.8% every year with Democ­ratic presi­dents vs only 7.8% with Repub­lican presi­dents.1

A deeper look into these numbers provides additional expla­nation. The two best 8‑year periods of stock market perfor­mance occurred under Democ­ratic presi­dents: the tech boom of 1993–2001 under President Clinton and the recovery from the great Recession under President Obama. Conversely, the two biggest crashes in recent memory occurred under Repub­lican George W. Bush: The Tech crash of 2000–2002 and the great Recession of 2008–2009. However, if we take a longer view and go back to the beginning of our current two-party system in 1860, we can see that there is not much difference in stock market perfor­mance based on which party occupies the White House. The return for Democrats is 8.8% and for Repub­licans, it is 8.6%.2

But I can hear you saying that this analysis is far too simple. As any 8th Grade Social Studies student can tell you, Congress passes laws, not the president. So, surely this analysis should include which party is in control on Capitol Hill, not just who is sitting in the White House. That is a fair point. Consider the following historical combi­na­tions of presi­dents and Congress with their respective rates of return:

Repub­lican PresidentRepub­lican Congress8.6%
Repub­lican PresidentDemoc­ratic Congress8.7%
Democ­ratic PresidentRepub­lican Congress10.9%
Democ­ratic PresidentDemoc­ratic Congress8.2%3

What does this all mean? Well, the data indicates that the market’s best perfor­mance has occurred when there is a Democ­ratic president and a Repub­lican Congress. Does this mean our 401ks will do the best with a Biden win in November and Repub­lican victories in the house? Maybe. But the stock market is massively complex and teasing out causation from the limited data we have is incredibly difficult. As noted author and investor Jeremy Seigel observes, “Bull markets and bear markets come and go, and it’s more to do with business cycles than presi­dents.” 1 Furthermore, we can often make connec­tions in the data (e.g., Presi­dents and stock markets) that aren’t actually meaningful even if they appear to be connected. Consider for example that markets seem to prefer presi­dents who are over 6 feet tall. These taller presi­dents have presided over markets that have returned over 8% more annually than their more vertically-challenged counter­parts.4

There is no crystal ball to predict the stock market. All we know is that over time, the market has marched upward. So, come November, vote for the candidate you think is best for the country. No matter who wins, don’t panic: the stock market will take care of itself

1 Klebnikov, Sergei. “We Looked at How the Stock Market Performed Under Every U.S. President Since Truman – And the Results Will Surprise You. Forbes​.com. 7/23/2020.

2 Timmer, Jurrien. “Presi­dential Elections and Stock Returns.” Fidelity​.com/​v​i​e​w​points. 1/29/2020. 3 Timmer, Jurrien; Ibid

3 Timmer, Jurrien; Ibid

4 Pfau, Wade. “How Do Presi­dential Elections Affect the Markets?” Forbes​.com. 4/21/2016