How does politics affect the stock market?

Are Democrats or Republicans better for the Stock Market?

Americans are more politically polarized than ever. Given that the economy is at the top of many voters’ minds, it’s worth analyzing how the stock market performs during each party’s administration.

Republicans are generally aligned with business and take a “laissez faire” or free-market approach to economic regulation. Microeconomics consistently shows that forgoing a free market and instituting price controls will result in an inefficient and wasteful allocation of resources.

Democrats generally prefer to regulate and intervene in economic affairs to reduce financial inequality. Macroeconomics shows that redistributive fiscal policy will increase aggregate demand and economic activity.

Both approaches are rooted in sturdy economic theory, but which one provides a better environment for financial markets?

Looking at the Data

Below is an analysis of stock market returns and inflation for each US president back to 1888. Because the stock market tends to be forward-looking, returns are calculated based on when the next administration becomes known (i.e. after an election, death, or resignation). The data is weighted based on term length.

PresidentPartyAvg Annual ReturnAvg Annual InflationAvg Annual Real Reaturn
Benjamin HarrisonR5.48-2.738.43
Grover ClevelandD-2.88-3.060.19
William McKinleyR19.423.6915.18
Theodore RooseveltR5.021.953.01
William Howard TaftR9.562.596.80
Woodrow WilsonD3.559.26-5.23
Warren G. HardingR7.43-5.1613.28
Calvin CoolidgeR26.990.0026.99
Herbert HooverR-19.31-6.23-13.96
Franklin D. RooseveltD11.422.378.83
Harry S. TrumanD13.845.497.91
Dwight D. EisenhowerR15.091.3813.52
John F. KennedyD14.311.1113.06
Lyndon B. JohnsonD10.642.767.66
Richard NixonR-1.396.02-6.99
Gerald FordR16.567.318.62
Jimmy CarterD11.6610.011.50
Ronald ReaganR14.644.469.75
George H. W. BushR14.054.229.44
Bill ClintonD18.742.5915.74
George W. BushR-2.752.77-5.38
Barack ObamaD23.371.7220.33
Donald TrumpR17.553.6513.03
Average DemocraticD11.634.697.78
Average RepublicanR9.171.717.27
Bipartisan AverageD+R10.122.877.46

Conclusion: Which party is better?

It turns out that it doesn’t really matter (after accounting for inflation). Even looking at the nominal returns data, both parties have a similar effect on market performance. It appears that historically mainstream politics has no material effect on the stock market. Of course there is always potential for an extremist president to cause severe effects. For investors concerned with risk, perhaps it is advisable to vote for the most centrist candidate.

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