A Democrat or a Republican president?

Market impact of the presidential election cycle

Despite the fact that the stock markets have perhaps not yet woken up to the upcoming elections, the result could certainly affect performance in the coming years.

One difference between the fundamental values of the Democrats and the Republicans shows that Republicans should be better for the stock markets. Democrats think that strict regulation is needed and are always looking for tax revenues to invest in welfare programmes, whereby the economic wealth of prosperous Americans and large companies is to some extent transferred to less well-off parts of the population. Republicans are strong supporters of entrepreneurship (less regulation) and tend to look for tax cuts (such as under George W. Bush Jr). This should be good for the stock markets, but this is not the case.

The connection between the presidential cycle and the US stock markets has always been a hot item. There have been several studies of the impact of the presidential cycle on the stock markets. A study of the presidential cycle by Ned Davis shows that since 1900 the stock markets have performed well mostly in the election year itself and in the third year of the presidency (study by Ned Davis based on the performance of the Dow Jones Industrials Index).

Further analysis since 1944 however shows that there may be a significant difference in return depending on the result of the election. The average annual return under a Democrat president is more than 2% higher than when a Republican president is elected. Furthermore, the performance of the S&P 500 is markedly better in the first year after the elections when the president is a Democrat. The average return after the election of a Republican president is actually negative. The markets have thus performed extremely well under quite a few Democrat presidents, including Bill Clinton and more recently Barack Obama, while the S&P 500 declined under the Republican George W. Bush, who ended his mandate in a period of financial crisis.



Conclusion

An analysis of the historical returns of the S&P 500 shows that a Democrat president is better for the performance of the stock markets and the election of a Republican president can lead to a negative performance of the US market in the first year of their presidency. Despite the clear connection between the presidential cycle and the stock market, it is by no means certain that a specific pattern will repeat itself during each cycle. In combination with the usual fundamental and technical analysis however, it may offer an additional insight that may help to optimise your investment decisions.