Stock Performance And The Political Party In Power: An Historical Look At The Past 75 Years
Stock markets have continued to trend higher despite the coronavirus and the onslaught of disinformation surrounding it. Even after the Capital was breeched by a mob of insurrectionists – an assault on our democracy, stocks shrugged it off. With democrats about to take full control of the federal government, it’s worth asking the question: How have stocks performed whenever one party held the presidency and both sides of Congress? To find the answer, we will examine the past 75 years of historical data using the annual returns of the Dow Jones Industrial Average as our proxy.
In the 75 years since the end of WWII, the Dow Jones Industrial Average has averaged about 8.3% per year. During this period, we’ve survived 12 recessions, the Vietnam War, an oil embargo, a Tech Bubble, a housing crisis, and now, a global pandemic.
Overview: Political Party in Power
Since 1946, republicans have held the White House 53% of the time compared to 47% for democrats. Control of Congress tells a different story. For example, democrats have controlled the Senate and House 63% and 68% of the time, respectively. Control of the presidency, Senate and House has been rarer. During this period, democrats had complete control 28% of the time compared to 10% for republicans. While we will look at stock market returns in all scenarios, our focus will be on stock performance whenever one party controlled it all.
Stock Returns by Political Party in Control
The chart below contains the average stock market performance under various political leadership scenarios, labeled A-E. When democrats occupied the White House, stocks averaged about 9.0% per year compared to 7.4% under republicans [A]. When you look at the political party in control of either side of Congress, republicans hold an edge. For example, when republicans had a majority in the Senate, stocks averaged about 11.3% compared to 6.3% when democrats were in charge [B]. In a republican controlled House, stocks averaged about 10.7% compared to 7.0% under democrats [C].
How did stocks perform whenever one party held the White House and Congress? Again, while total control is rarer, under republicans, stocks averaged 8.0% per year compared to 6.7% under democrats [D]. In fact, stock performance was above average only when a democrat was president, when republicans held a majority in either side of Congress, or when Congress was split. When democrats held the majority in the Senate or House or when they had total control, stock performance was below the average. When republicans had total control, stock performance was also slightly below average.
MORE FOR YOU
What mix of political control was best for stocks? Irrespective of who held the White House, stocks performed best when political control of Congress was split [E]. Although this has only happened 16% of the time, stocks averaged a healthy 12.9% per year when the leadership of Congress was split between democrats and republicans [E].
What lessons can we derive? We cannot simply draw conclusions from the data alone. We must understand the current climate. What are the risks?
The greatest risk to stocks is the coronavirus. Stocks are also very overvalued at the present time. Rising interest rates are another key issue to consider. Finally, civil unrest and the transition from a turbulent Trump term to a democratic dominated Congress all combine to create plenty of uncertainty. Remember, corporations are agnostic. They thrive when the rules are known and tend to suffer when uncertainty is elevated as it is now.
Will a democratic majority in D.C. bode well for stocks? Not according to history. However, I expect the incoming administration will do a better job handling the coronavirus. Plus, we can be sure of this: more stimulus is coming soon. Money may not cure all our ills, but in this case, it can be the bridge that gets us to the other side of the coronavirus. Unfortunately, todays massive borrowing comes at the expense of future generations. Stocks may be the only game in town as bonds do poorly with rising interest rates and cash is paying next to nothing. But the game is constantly changing. Therefore, investor beware. Stay tuned for more.