Does the Market Have a Political Preference?

Does the stock market favor one political party over another? One might assume the performance would be roughly in line over a long period of time under both Democratic and Republican administrations.  Surprisingly, history tells a different story. Going all the way back to 1932 with the election of Franklin D Roosevelt, there have been 7 Democratic and 7 Republican administrations.  This encompasses a period of time that includes the recovery from the Great Depression, World War II, an oil embargo, the Dot-Com Bomb, the Global Financial Crisis, and of course, most recently, a global pandemic.  In short, there have been plenty of economic disruptions or crises with both parties at the helm of government.   A commonly-held belief is that Republicans are the party of fiscal responsibility, lower taxes, increased job prospects, and lower deficits while Democrats focus on the expansion of social welfare programs that carry a higher price tag, resulting in higher taxes and/or deficits. Do these conventions hold up?

According to the data, over the last 9 decades, the Republicans have lagged their counterparts in terms of economic growth (as measured by GDP and job growth) and stock market returns.  Below is a chart of annualized GDP (Gross Domestic Product) growth by administration.


One need not be a statistician to see the stark contrast.  According to Blinder and Watson[1], “The US economy has performed better when the president of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance.” 

Another way to view this is just looking at the headline numbers:

Now, let us take a look at how markets have performed under both Republican and Democratic administrations:


Again the data suggests that, historically, the stock market has performed better during Democratic administrations. 

Obviously, this does not prove cause and effect, nor does it show that there is a linear relationship.  The timing and severity of the crises outlined above has had a significant impact on the steepness and duration of market drawdowns.
This data does, however, complicate the argument about fiscal austerity versus stimulus.  As the Biden administration contemplates a $1.9 trillion recovery package, concerns about the debt level alone may be overblown if we are to look at history as a guide.  

[1] Blinder, A.S. and Watson, M.W., 2016, Presidents and the US Economy: An Econometric Exploration, American Economic Review, 106(4)

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