In part one of our Presidential Election series, we investigated
How Stocks Perform in Election Years. In part two, we will analyze stock market performance under each political party.
Every four years political pundits insist this Presidential election is the most important in our lifetime. Passionate participants on both sides of the aisle proclaim that picking “their” party for leadership will save America, while picking the other party will destroy it.
It is important to recognize that party platforms, definitions, and actions while in office have changed over time and now, in 2024, continue to shift as new hot button issues and global economic and political forces take form. Is a Democrat today really the same as a Democrat from the 1990s? Or is a Republican today the same as a 1980s Republican? Probably not, but the United States has functioned as a two-party system since before the S&P 500 index began tracking performance in 1926 allowing for a comparison of stock market performance under each party’s leadership.
From 1926 through 2023, we’ve had 23 Presidential Elections. In a U.S. Presidential election, there are really two outcomes: The Presidency can stay with the current party or shift to the other party.
The first question we would like to investigate is under which party were stock returns were better?
From 1926 to 2023, Republican and Democratic Presidents have presided for 47 years and 51 years, respectively. The average annual return for the S&P 500 under Republicans and Democrats was 9.3% and 14.8%, respectively. That is outperformance of 5.5% per year on average while a Democrat was President. This is a measurable difference.
(1)
However, when examining a unified versus divided government, the story is less clear. A unified government is defined as the same party controlling both the Presidency and Congress, and a divided government is when control amongst the two branches is split between the parties. From 1926 to 2023, we had an equal number of years of unified government and divided government (49 years each).
From the unified vs. divided government perspective, we can parse the data in to four groups for testing stock market performance.
Table 1: Stock Market Performance under Combinations of Unified & Divided Governments
| Situation |
Number of Years |
S&P 500 Index Annual Average Return |
| Unified Republican |
13 years |
14.52% |
| Unified Democrat |
36 years |
14.01% |
| Total Unified Government |
49 years |
14.14% |
| |
|
|
| Divided with Republican President |
34 years |
7.33% |
| Divided with Democratic President |
15 years |
16.63% |
| Total Divided Government |
49 years |
10.18% |
Data from 1926 through 2023. A unified government means that the Presidency, the House of Representatives and the Senate are all controlled by a single party. A divided government means that at least one houses of Congress, or the Presidency is controlled by the other party. Indexes are not available for direct investment.
For educational purposes only.
As can be seen in Table 1, there is not much of a difference between the historical average returns between unified Republican and Democratic administrations. However, under divided power, it is remarkably different. The market has done significantly better with a divided government with Democratic President then with a divided government with a Republican President.
Are we suggesting that as prudent investors we should be rooting for a Democratic President and Republicans holding at least one of the Houses of Congress? Certainly not. This is but one interesting piece of statistical analysis that should be considered among a myriad of other factors that influence stock market returns. The best year ever for the S&P 500 was 1954 when Republican Dwight Eisenhower was President, accompanied by a Republican controlled Congress, returning a whopping 53.6%.
The U.S. Presidential election is probably the most watched event in the world. It is no exaggeration to say that the U.S. President is the single most powerful person in the world, so the entirety of the world is watching with interest, including the financial markets. Every statement and action are rigorously analyzed and considered from every possible angle.
None of the information presented today is secret. Traditional stock market theory states that stock prices are based on all publicly available information. Many stock market participants know that, historically, the best outcome is a Democratic President with a divided Congress. Therefore, this information shouldn’t provide investors an additional edge.
The fact that Democratic Presidents have had better stock returns than Republican Presidents does not imply that electing Republican President is a vote for poor relative market performance. A better way to interpret these results is simply that Democratic Presidents have presided over periods when the “market” has done better than when Republican Presidents were in office. That can be interpreted however you’d like.
What does this information mean going forward? Will this pattern persist into the future?
At WT Wealth Management, when we look at historical data, we repeatedly ask ourselves “is this a repeatable trend?”. Repeatability, simply using this information, is uncertain at best. Financial markets are never assumptive participants and are constantly forecasting, re-pricing, analyzing and updating expectations with countless new data points each day.
We at WT Wealth Management believe you shouldn’t make investment decisions based on who the President happens to be or who controls which house of Congress. Successful investors focus on the long-term and stick with the asset allocation strategy developed with your investment advisor based on your specific risk tolerance, time horizon and retirement goals.
For investors, the President, and Presidential Elections, are simply noise and catchy headlines -- in our opinion.
Sources
- Are Republicans or Democrats Better for the Stock Market?
RetirementResearcher.com
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