Should stock market investors hope for a unified or a divided Washington?
Does the party occupying the White House affect the U.S. stock markets and other economic measurements? How does the party controlling Congress affect markets?
While it’s interesting to review history and try to answer those questions, before we draw any conclusions, we should at least acknowledge that “past performance is no guarantee of future results.”
And that is especially true this year as virtually everyone would agree that COVID-19 has thrown the 2020 election into unchartered territory.
2020: Bull, COVID-Bear and COVID-Bull
In a period of about six months, the U.S. markets went from bull market to bear market to bull market. Or said another way, we went from historical market highs to a recession to a recovery in six months.
Remember, the S&P 500 peaked on February 19th at 3,386 and then cratered through March 23rd with a staggering 33.9% drop from its February 19th peak. Then on August 18th, the S&P 500 closed above its February 19th peak and another bull market was declared from the March 23rd bottom.
Yet while technically, those bull- and bear-market labels are appropriate, the reality is that with COVID still impacting our lives and stock markets, many might still feel as if we’re in a bear market or a recession, especially with unemployment still so high.
Will 2020 Snap the 70-Year Trend?
According to Ned Davis Research, the incumbent has had trouble when one of two conditions were in place during an election year:
1. When the stock market has recorded a drop of 20% or more in an election year or
2. When there has been a recession in an election year.
Consider this from Ned Davis Research: since 1900, the incumbent party has won five times and lost nine times when there was a 20% decline in the DJIA or a recession in the election year. And the last incumbent to win under these circumstances was Harry Truman in 1948. Said another way, since Truman was president almost 70 years ago, no party has retained the White House when there was either a 20% decline in the markets or a recession.
In 2020, we have seen both a 20% drop in the markets AND a recession. But again, remember that past performance is no guarantee of future results. Ever.
Republicans vs. Democrats
What effect does the party controlling the Office of the President have on stock markets? Well, according to Ned Davis Research, when adjusted for inflation – and that’s actually a big adjustment but an entirely different topic altogether – since 1900 the Dow Jones Industrial Average has gained:
• an average of 3.8% annually under Democrats and
• an average of 1.1% under Republicans.
What effect does the party controlling Congress have on stock markets?
• When Republicans control both the Congress and the White House, returns have averaged 7.09% a year.
• When Democrats control the Congress and the Presidency, the market has risen an average of 2.96% a year.
Other Things to Consider
The statistical evidence shows that the stock market performs better under Democratic presidents. Many might try to explain this growth gap as largely the result of good luck, but an examination of all presidential terms would likely demonstrate that while luck might have been present, it does not explain the differences completely. The fact is that Democratic presidents have served during flat, falling and rising markets too.
Further, we need to remember that there is generally a lag of a year or two before a president’s policies affect growth and by that time, the mid-term elections come into play too.
Finally, always remember that while a president’s influence is large, it is still limited. Congress, world economies, foreign governments, military affairs, the Federal Reserve, and many other factors outside of a president’s control influence the stock market and the economy.
Again: past performance is no guarantee of future results.