As a Wealth Advisor, I hear a lot of excuses for people not to invest. And when it’s political season (especially in a Presidential cycle), the reasons people use to justify their behavior is heightened due to emotional reasons, not necessarily logic or history. In this diary, I hope to help give you data and facts. This is not a recommendation to invest. If anything, I want the folks here at Daily Kos to be validated in what we think: that the economy and stock markets typically do better under Democratic leadership. As always, past performance does not guarantee future results.
The following is a synopsis from a research report of my firm, Morgan Stanley.
- Over the long term, market performance is more closely correlated with the
business cycle than political party control.
- Historically, real GDP (gross domestic product...or the output of the US economy) growth tended to be stronger during presidential election years than in other years. When assessing by political party, economic growth and the S&P 500 Index was stronger, on average, under Democratic administrations.
- While political outcomes may contribute to industry regulation and profitability,
fundamentals may be more influenced by the business and economic cycle.
- Investor fears around general election outcomes may often be misplaced due to
individual policy bias. While we acknowledge the occurrence of delayed policy
implementation and coincident data, “conventional wisdom” often does not align
with market results regarding the combination of policy, business cycle and
valuations.
When analyzing historical data at the intersection of economics, markets and political cycles, we see distinct trends arise in presidential versus nonpresidential election years.
When assessing underlying economic indicators, average year-over-year real GDP growth in presidential election years since 1942 surpasses nonelection years by approximately 0.24%.
While not the singular determinant, presidential outcomes are correlated with GDP performance in the months prior to an election. According to the Center for the Study of Democratic Institutions, a 5% increase in GDP results in a corresponding 6% gain in incumbent vote share. This relationship may support the economic upside experienced in election years relative to nonelection years and underscores the important role of the economy in campaign messaging.
Once a president is sworn in, investors closely monitor economic policies. Assessing the average annual real GDP growth of all years of a presidential term by political party beginning in 1928, we see that Democratic term real GDP growth outperforms Republican term real GDP growth by
2.7% (see Exhibit 3).
Exhibit 9 shows the S&P 500 average excess returns for Democratic and Republican presidential election years. Overall, markets underperformed during Republican regimes, with excess returns down during the first two years in office. Conversely, market performance under a Democratic
administration saw positive excess returns over the same period.
Evaluating S&P 500 average annual returns for all years since 1928 by political party, Democratic presidencies report higher returns than Republican presidencies by more than six percentage points (see Exhibit 10).
When considering the outcomes of an election cycle, it's not only important to consider who controls the White House, but also which party controls the House of Representatives and the Senate. This is a critical element when looking to policy as an input for investment strategies, as Congress is in
many ways more influential than the president when formulating a tax agenda or fiscal policy, for example. As detailed in Exhibits 13 and 14, Democratic control of the executive and legislative branches was more positive for markets within the first two years in office than during a
Republican sweep, with value, growth, small-cap and large cap stocks all performing well during the 12 and 24 months after Inauguration Day.
This dynamic does not change much when the House and Senate are controlled by different parties. Value and growth stocks again reported greater average returns within the first year when a Democrat held the White House and Congress was split, 22.9% and 26.1%, respectively. Similarly, under a Democratic president and a split Congress, small-cap and large-cap stock performance was stronger, at 30.9% and 25.0%, respectively.
The business cycle is more important to market performance than the political party in the White House. That said, investors are likely to become concerned not only about broad market performance, but also with the strength of various asset classes under different public policy and regulatory regimes. While it is natural in some cases to assume that the personal or professional
background of a president may be associated with specific asset class returns, investors are commonly mistaken.
For example, one could easily assume that oil would do best under President George W. Bush, a Republican (R), given his oil industry background. However, oil posted its strongest historical performance under his successor, President Barack Obama, a Democrat (D). While the past does not predict the future, it may serve as a guide.
Investment Conclusion
The business cycle is more relevant to market performance than political party. However, we also observe that, from a macroeconomic lens, GDP growth tends to be stronger during presidential election years than in other years and appears more robust under Democratic presidential control. Additionally, we saw that the US dollar exhibited higher volatility and tended to appreciate surrounding election years.
When assessing equity returns, we found that Democratic administrations reported stronger S&P 500 average annual returns for all years in office when compared with GOP administrations.
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