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Does Wall Street Prefer A Democrat Or Republican President? at Trader’s Narrative

The prediction markets and the polls were correct. Barack Obama is the next president of the United States of America. As a quick aside, America please accept my hearty appreciation and congratulations for your choice. If you listened carefully, just before the thunderous celebration across the globe, you heard a sigh of relief.

Putting aside today’s market slide of 5%, the important question is what does Wall Street prefer? a Democrat or Republican in the White House? Republicans’ reputation is of being more capitalist and business friendly, and the Democrats of being “tax and spend” as well as more prone to regulation. But just like the myth of gold as a safe-haven, the facts do not support this assumption.

democrat republican stock market returnsHere is a chart showing different historical returns for the stock market under different administrations (source: Federal Reserve Bank of San Francisco).

The biggest outliers in recent history are, of course, Coolidge who’s presidency oversaw the 1925-1929 bubble and Hoover, who presided over the bust that followed. But even if we ignore these or by extension of the time horizon, go back far enough, the relationship still holds: Democratic presidents coincide with much higher stock market returns.

Another study that looked at the relationship between politics and investment returns was by Pedro Santa-Clara and Rossen Valkanov. Their paper titled “The Presidential Puzzle: Political Cycles and the Stock Market” was published in The Journal of Finance in October 2003. In it they show that during Democratic governments, the US stock market (between 1927 - 1998) provides an excess return of 10.69% above the 3 month Treasury Bill rates. While Republican presidents provide an excess return of 1.69% over and above 3 month Treasury bill rates.

According to Ned Davis Research the S&P 500 Index performs poorest in the first year of the four-year election cycle. Since 1900, the stock market does best in the pre-election year (11.3%) and the election year itself (9.5%). The pre-election year didn’t live up to its historic pattern - to say the least!

Here is a recent visualization from the New York Times, showing 80 years of market returns:

stock market returns democrat republican presidents
Source: New York Times

If you aren’t satisfied with this myth being upended, here is an interesting tool that lets you make different assumptions about the stock market returns under different administrations. For example, you can check what would happen if we include dividend reinvestment. Or what about the effects of inflation? And time lag for policy effects? You get the idea.

President-Elect Barack Obama
In case you didn’t catch it, here is Obama’s victory speech (putting Cicero to shame).

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6 Responses to “Does Wall Street Prefer A Democrat Or Republican President?”  

  1. 1 Russ Abbott

    I’m glad Obama won. (I voted for him.) I had heard that it was a myth that Republicans are better for the stock market than Democrats–and I was happy to hear it. But your data disappoints me. The median improvement in Democratic administrations is 7.6%. The median improvement in Republican administrations is 10.2%. Too bad.

  2. 2 Gary

    I for one welcome our socialist marxist communist muslim overlords

  3. 3 Tyler

    I do believe that you have misunderstood the information behind your statistics. for one as the economy does well along with businesses, people are more likely to vote for the person who is going to continue that trend. In that case republicans are better for business. however, as the economy does bad it causes individuals to think on a more personal basis leading them to vote for the candidate who is most likely to help the individual and not the big or small businesses. leading the people to vote for a democrat who supports such programs. If your catching on to what I’m saying you’ll see that the democrats are merely being elected in time frames that are in a market slump and are being rewarded with the inevitable market recovery to come. Also it doesn’t matter who is in office the market doesn’t give a damn.

  4. 4 mythster

    “Figures don’t lie but liars…”
    What we’re really talking about is government regulation of the speculators, hedge-funders, naked short-sellers and other day traders that caused the mess we’re in now. Obviously they know that the government will have to put the brakes on before the country goes into chapter 11 and they hate it. The smail business rallying cry is just another bit of the free marketeers’ party.
    Real small business owners (the ones who are not making more than 250K a year) will do fine under the new administration but the fat cats make take a little haircut before the end og Obama’s first term - but not right away.
    Someday maybe, real investors will dominate the market and then things will get back to normal and everybody will have a fair shot at getting a decent but not obscene return on their money and the crap-shooters can go back to Vegas where they belong

  5. 5 Babak

    Russ, not sure where you’re getting those numbers?

    Gary, lol, a simpsons quote!

    Tyler, that thesis would only hold water if we flipped Dem/Republican every 4 years. That isn’t the case.

    mythster, in a real free market system it is near impossible to isolate the “crap-shooters” from “real investors”. How do you propose we do such a categorization?

  6. 6 GaryT

    This analysis is total garbage. What happens each and every time a President is in office? The congress goes to the opposing party over time. To say that the Democratic president means superior gains is the same as saying that when the market gets information that the Republicans are gaining ground in congress, the market goes up. If you want to know who the market prefers, just ask someone who has been trading in the market for several decades. Like any person, no business owner wants his or her entity to be taxed or regulated.

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