US market performance since 1900: Republicans versus Democrats
By Colin Cieszynski (Senior Market Analyst at CMC Markets, Canada)
Although the Republicans are widely seen as being generally more favourable to business, since 1900, stock markets have actually performed better under Democratic presidents.
Although the Republicans have spent more time in office over the last 112 years, the Democrats have posted an average return over month (0.73% to 0.38%) and average monthly return over the same month a year earlier (8.00% to 6.37%).
Normally one would expect higher returns to come with higher risk but under the Democrats, risk as measured by the standard deviation has been lower based on both monthly (5.22% vs 5.56%) and yearly (20.25% vs 22.13%) volatility.
How does the current administration stack up?
Dividing the return for each President by the risk gives an indication of how markets have performed under each President. Interestingly, many of the overall more successful Presidencies have also performed well under this measure, while many of the Presidencies widely considered to be less successful find themselves at the bottom of the table.
Interestingly, Presidents Reagan and both Roosevelts find themselves a bit lower on the table than might be expected while the first President Bush had a very strong market performance despite not winning a second term.
In terms of market performance, the first term of President Obama has been very successful, ranking fifth overall and second among Democrats in terms of return relative to risk.
So what does this mean for President Obama’s re-election chances? In the chart below, we compare the return relative to risk for first-term presidents that sought re-election. In this table we have only included those Presidents who started their first term by being elected into office. Those who took over mid-term from another President have been excluded.
The results show that in general, incumbents with successful market performance tend to be rewarded with another term while those with particularly poor performance tend to be thrown out of office. The main exceptions were the two President Bushes with the first losing his re-election bid despite a strong market performance and the second winning re-election despite weak market performance.
President Obama’s returns to date have been near the top of the Presidential league which normally would suggest market conditions favour re-election.
This election is all about the economy and the size of Government
In case there was any lingering doubt, the addition of Rep. Paul Ryan to the US Republican ticket means that the economy and the role of government within it is likely to be the key point of discussion this election. Mr. Ryan has been one of the key figures in the Grand Old Party in the ongoing spending debate.
This election features a clear choice between Republicans looking to lower taxes and cut spending and Democrats who have been in favour of a bigger role for government and selectively raising taxes to pay for programs.
Areas related to this debate that may remain battlegrounds and could impact stocks include support/opposition to Obamacare, energy policy (which includes decisions on whether or not to allow drilling and/or pipelines in areas where there is opposition, and alternative energy investment/subsidies) and defense spending.
The ongoing debt crisis in Europe indicates that the days of funding spending or tax reductions through borrowing is coming to an end in many countries around the world. This leaves the public with a referendum on the question of not only how much government do they want but also how to pay for it.
This clear cut choice could set the trend for government spending for a generation, suggesting that this election may become a major turning point in US history.
20-Year cycles suggest this year could be a big turning point
One of the most glaring questions from the analysis of Presidential market returns is why the first President Bush lost in 1992 when his market performance was so strong. It appears that his bid was caught up in a stronger generational cycle of political change.
Over the last century, a cycle of major shifts in power and policy occurring more or less every twenty years has been playing out. Throughout the twentieth century, these cycles tended to come to a head in election years ending in 2 which coincided with major changes in political direction.
The results show that in four of the five elections, power changed between parties. In three of the five cases (1932, 1952, 1992), markets rose substantially in the ensuing years. Two of those periods were Democrat wins versus one Republican. The 1912 election was followed by large declines due to the outbreak of World War I but had recovered by the three-year mark.
The one election where the party was re-elected (1972) was followed by the severe 1973-1974 bear market and tremendous political instability.
Considering that we are only four years on from the even worse generational bear market of 2007-2009 and still digging out from it, a repeat of the post-1972 experience should the Democrats win appears unlikely.