As the presidency goes, so goes the stock market—and history appears to prove it. From 1928 through 2015, the S&P 500 returned an average of 10% a year under Democratic presidents, compared with just 1.8% under Republicans, according toFidelity International.
The data may surprise some, since the Republicans are widely touted as the more business-friendly political party. Nonetheless, the message to investors seems clear: If you want higher returns, vote Democrat.
And yet, as a veteran financial advisor, I urge my clients to ignore historical connections between presidents and markets. Why? For the same reason I advise them not to chase hot stocks: Past performance is no promise of future results.
Over the long run, the stock market doesn’t move based on who’s in the oval office. It acts in accordance with the regular cycle of economic growth and contraction. When an economic slowdown nears, the market begins to discount asset prices. When signs of a recovery appear, the market begins rising.
Presidents don’t control the entire government, much less the tidal forces of economic cycles. And, while their comments may spook or thrill the stock market in the short term, presidents don’t control the stock market either. What does move the economy, and thus the market? The answer is macroeconomic factors—from oil prices to interest rates.
Consider that presidents Nixon, Ford, and George W. Bush served during major increases in oil prices, while most Democrats (Carter being a notable exception) presided over stable or falling prices, which tend to spur the economy.
Low interest rates, meanwhile, can spur the economy and the market. And, in theory, presidents have some control over interest rates based on whether they nominate hawkish or dovish Federal Reserve leaders. But it often doesn’t work out that way.
In the 1970s, Carter nominee Paul Volcker jacked rates up sharply in order to break the back of inflation. That helped to crush Carter politically, but set the stage for an expansion under Ronald Reagan. On the other hand, Alan Greenspan and Ben Bernanke, both nominated by Republicans, kept rates low.
There’s also the matter of fortunate timing. President Obama took office at the start of the Great Recession. But the economy, even after the nastiest contractions, is still a cyclical phenomenon. And when the economy began to recover, Obama could claim credit.
The stock market’s cyclicality, too, can make winners or losers of presidents. Republican President Gerald Ford found himself on the right side of the pendulum in 1974, when he took over for Richard Nixon. The market had plunged under Nixon, setting the stage for a bounce back: under Ford, the S&P climbed 18.6% a year through 1976. (It wasn’t enough to win him re-election, as Americans ultimately sought a clean break with the Nixon era.)
Bill Clinton’s timing was also good. He didn’t create the technology boom, but he did take office as it was beginning, and it helped the economy to grow during his two terms.
So do presidents’ policies really matter to the economy and markets during their terms? They can, and taxes are probably the most meaningful example. For a good synopsis of the leading candidates’ tax proposals, check out this PolitiFact article.
Still, it’s premature to make any portfolio adjustments based on the candidates’ tax plans. Remember that Washington is built on checks and balances, and any legislation faces a tough slog to become law.
Perhaps the wisest course of action is to maintain a diversified portfolio—one that is designed to look far beyond the upcoming election in order to protect and grow your money.
Disclaimer: Information contained here is for information use only and is not a solicitation for services. Neither Sanjeev Sardana nor BluePointe Capital Management provide tax advice. Please consult with your tax advisor for further information.