With trepidation, we venture into the controversial arena of politics. This year’s election is on every investor’s mind. Rather than address which presidential candidate is better than the other or make predictions, we instead focus on historical stock market returns under different presidential and congressional scenarios.
According to S&P Capital IQ, the average annual return since 1945 for a Democratic president is 9.7% compared with 6.7% for a Republican president. The average annual returns for each president since 1945 are illustrated in the chart below. Republican President Gerald Ford has the highest annual return of any president listed. In a stock market return scorecard, it does help to become president after a period of decline.
You might be curious to review historical stock market returns that account for both executive and legislative branch control. The average annual returns for the S&P 500 under different political control scenarios from 1901 to March 2016 are shown in the chart on the next page. Note that most political control scenarios have produced positive stock market returns. When a Democrat is president and Republicans control Congress, the S&P 500 has an average annual return of 8.6%, or 6.2% higher than the reverse scenario. You may have heard that gridlock in Washington is good for the stock market, but clearly not all gridlock is created equal. Surprisingly, one party control isn’t detrimental for the stock market either. The average annual return when either Republicans or Democrats control the presidency and Congress is 7.1%.
Government policy and legislative action can impact stock market returns, but politics aren’t the primary driver in the long run. Some of the drivers outside of government control are economic growth, the level of employment, inflation, demographics, and market valuation. A simple historical analysis of stock market returns under different political control scenarios doesn’t take into consideration these economic forces outside of government control. As pointed out earlier in the President Ford situation, it also helps to inherit a stock market that has declined and has more upside potential irrespective of future economic growth.
Foster & Motley clients won’t see any changes to their portfolios in anticipation of a particular election outcome or post-election, other than to rebalance in response to large moves that may occur either way. We will continue with our discipline of broad diversification and leave the political and stock market forecasting to others. Regardless of which candidate wins the election or which party controls Congress, it is important for investors to focus on the long run. Our country has experienced both “good” and “bad” presidents with different makeups of political control. The economy has grown and the stock market has prospered, hitting a new all-time high this year. We will leave you with a quote from famed value investor, Benjamin Graham, which is still relevant - “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”