How do Elected Governments Affect the Stock Market?
Every four years, our clients are eager to talk about the election’s influence on their portfolios and the broader economy. And, as has been consistent over the last 20+ years, our response is dreadfully dull. Let me explain.
Generally, the stock market is apolitical, showing no preference to either Republicans or Democrats (Li & Born, 2006). Historically, Democratic administrations are associated with more expansionary policies. With a more inflationary approach in mind, Democratic administrations are also more inclined to juice the economy with Gross National Product expanding at 5%, versus 1.2% for a Republican administration in their first two years (Alesina & Sachs, 1988).
The market cares little about the president, the Senate, or the House. As Figure 1 below highlights, an investor who placed $1,000 into the stock market beginning January of 1926 amassed significant wealth, regardless of the political leanings and party affiliation of the President.
Figure 1
You might be thinking, “but this time, it’s different”. Probably not. The chart above includes years with impeached presidents, wars, crisis, and plagues, and as you can see by growth over time, the stock market cares minimally about these events. Don’t just take my word for it. Read history and periodically look at Figure 1 as a reminder.
The data we have reviewed suggests that there is almost no evidence connecting stock market performance (good or bad) with a president and their political affiliation. Consequently, households should focus on their financial plan and the rate of return necessary to achieve their goals, and less about the election and its impact on the market.
References
Alesina, A. and J. Sachs, 1988, Political parties and the business cycle in the United States, 1948–1984, Journal of Money, Credit and Banking, 63–82.
Li, J., & Born, J. A. (2006). Presidential election uncertainty and common stock returns in the United States. Journal of Financial Research, 29(4), 609-622.
