Republican or Democrat: What is best for the stock market?
It is natural to feel concerned about which political party might be better for the stock market and there is definitely no shortage of opinion out there about what the market will do if either of the current presidential candidates win. There are positives and negatives to each election result scenario, and it is difficult to really say how stocks will react to a win on either side. The truth is that none of us have the crystal ball that will tell us what November will bring. What we do know, is that over the history of the market, stocks have continued their upward trend regardless of which presidential party was in power. The chart below shows the growth of $1,000 in the stock market since 1925.
This simply means that over the long term, it pays to be invested in stocks. Knowing that, let’s take a look at the shorter term to see how the market has fared under recent administrations and led us to where we are today.
Taking a look at history
This chart shows the performance of the S&P 500 during each presidential term from the day they took office.
President Reagan’s 1980s are commonly remembered as a period of strong economic growth. This is true. The mid-80s economy was strong and defense spending was a high priority for Reagan and his efforts to end the Cold War. However, it wasn’t always a smooth ride. At the time Reagan took office, America was trying to recover from a devastating energy crisis and hyperinflation. Before the successful recovery, the actions taken to battle inflation plunged the US into recession and high unemployment early in Reagan’s tenure. During the economic recovery, the stock market saw 5 separate years of double-digit growth under Reagan. Yet, he also was in power during the market’s single worst day in history, Black Monday, when the Dow fell 22.6%.
President George H.W. Bush continued the momentum from Reagan. However, the Gulf War and the savings and loan crisis led to recession and soaring oil prices. Recovery was muted, unemployment was high and ultimately America decided to pass the torch to the other side.
President Bill Clinton was at the helm during the longest period of economic growth. GDP growth exceeded 4% in 5 of President Clinton’s 8 years and unemployment sank below 4%. New industries were created as the internet grabbed hold. The stock market grew right along with the economy logging 2 of the S&P 500’s top 10 years ever. However, the impressive stock market under President Clinton ended with the Dot-Com bubble bursting shortly after he left office.
President George W. Bush had a frustrating run considering the stock market. Many refer to 2000-2010 as the lost decade in the US stock market where the S&P 500 had a negative 10-year return. He inherited the Dot-Com bubble and the economy sank into recession. Then, America was attacked on 9/11. Low interest rates and de-regulation led to a short recovery that ended with the Great Financial Crisis in 2008.
President Barack Obama entered during the Great Financial Crisis which continued through the first year of his presidency. Heavy government stimulus was needed to bail out the auto industry and the financial industry and turning the economy around was a slow process. Economic growth never returned to the levels above 3% seen during the 80s and 90s. The stock market was a different story. It began the longest bull market in history with the S&P 500 almost tripling under President Obama’s term.
The start of President Donald Trump’s presidency coined the term the “Trump Bump” in the market. Stocks that had already experienced almost a decade of growth, rallied impressively with an agenda of tax-cuts and de-regulation. Corporate profits peaked and unemployment bottomed. However, uncertainty and mixed messages from his administration along with a trade war led to an increase in volatility and an economy that still hasn’t surpassed the 3% GDP growth rate. When the pandemic hit early this year, the bull market ended with stocks falling 34%. The economy turned to recession with record unemployment but both stock market and economic recovery is quickly underway. We will see how this year ends up from here.
What can we learn?
History shows that it may not really matter what party is in power when it comes to the stock market. There have been many surprises along the way. Who would have thought that Ronald Reagan, an actor and union leader, would be successful with the economy while George W. Bush, a businessman, would struggle? Who would have expected that Barack Obama, a Democrat, would experience a stock market that contributed to staggering wealth accumulation and inequality while President Trump, a Republican, has produced a record increase in government spending and provided universal basic income to battle a pandemic? Each president going back to Reagan has had to deal with their own unique economic issues. Investors seem to take political policy in stride and adapt to change.
Focus on the fundamentals
During election years, the market has historically performed well.
However, historical behavior shows that anxiety tends to get the better of us and we start to hoard cash during election years. Especially this year. The graphs below show the difference between flows into money market funds versus stock and bond funds during historical election years and now during 2020.
Emotion, impatience, and nearsightedness are common factors that lead to investment mistakes. As an investor, it is important to not get too bogged down in the political hype. Candidates will often embellish their track record or their ability to make changes and their results are often temporary. It is important to thoughtfully consider how political policy may affect your objectives, measure your risk and maintain a long-term perspective.