President Donald Trump has repeatedly warned that the stock market is doomed if he loses the 2020 election and Democrats take the White House.
According to a survey by Hartford Funds, 47% of investors also believe that a Republican president is better for investments, while 37% believe a Democrat is better.
But looking at history, the association of a Republican president with better stock market performance is not steeped in reality. Here’s what’s really the case.
Historically, the stock market performs better under Democrats.
It’s a commonly held belief that the stock market and economy perform best under a Republican president, thanks to the GOP’s corporation-friendly approach to taxes and government spending. But a look at the numbers shows the opposite is true.
“The historical record and the research on the divide between stock market performances assessing Democrat and Republican administrations is clear,” said Mark Hamrick, senior economic analyst at Bankrate. “Investors have seen more generous returns from equities when Democratic presidents were in the White House, going back to 1945.”
Analysis by CFRA Research found that since 1945, the S&P 500 has averaged an annual gain of 11.2% when Democrats controlled the White House, versus an average 6.9% gain under Republicans.
A study by Liberum, a U.K.-based investment bank, found similar results. The firm examined stock market and gross domestic product data going back to 1947, when official GDP calculations were introduced. It found that since 1947, the S&P 500 experienced an annual return of 10.8% under Democratic presidents, versus 5.6% under Republican presidents. The average annual U.S. GDP growth rate was 3.6% under Democrats and 2.6% under Republicans.
Even if you exclude the Great Recession and COVID-19 pandemic ― both of which occurred while a Republican was in office ― the data still shows stronger performance when Democrats occupied the White House.
That may be due to the conventional economic policies of the two parties; Republicans tend to stimulate the economy via tax cuts and business deregulation, while Democrats tend to stimulate the economy via wealth redistribution policies, including increased taxes and government spending.
“Corporate and income tax cuts tend to have a muted immediate effect on the economy, [while] government spending on items such as infrastructure, unemployment benefits and food stamps tends to have a greater impact,” explained Stuart Blair, a chartered alternative investment analyst and director of research for financial services firm Canterbury Consulting.
On the other hand, he said, it could be argued that the policies enacted by Republican administrations yield longer-term benefits that boost the economy for their successors.
A new report says Biden would be best for the economy.
Historical data aside, how might the 2020 election result affect the economy as a whole? A new analysis from economists Mark Zandi and Bernard Yaros of Moody’s Analytics says Joe Biden would have a stronger impact on the economy than Trump as president.
“Largely because of Biden’s substantially more expansive fiscal policies, the economy would return to full employment more quickly coming out of the pandemic than under Trump,” the report said. “Biden’s reversal of Trump’s policies on foreign trade and immigration would also contribute to stronger economic growth, so that by the end of their terms in 2024, real GDP would be $960 billion, or 4.5%, larger under Biden than Trump.”
That would translate to 7.4 million more jobs under Biden than Trump, according to the report.
Goldman Sachs’ chief economist, Jan Hatzius, recently echoed that sentiment in a note to clients, stating that a Democratic sweep of the White House and Congress would be great news for the economy in 2021.
“All else equal, such a blue wave would likely prompt us to upgrade our forecasts,” he wrote. The reason? Biden’s win would increase the probability of a stimulus package worth at least $2 trillion being passed shortly after the Jan. 20 inauguration, “followed by longer-term spending increases on infrastructure, climate, health care and education that would at least match the likely longer-term tax increases on corporations and upper-income earners.”
But the data might not tell the whole story.
Though presidents generally like to take credit for a booming stock market, the reality is that they can only affect it indirectly, Blair said.
For example, he explained, the president is responsible for executing and enforcing laws created by Congress, which can include regulations that affect businesses. The president can also nominate the chair of the Federal Reserve, which sets monetary policy to achieve economic growth, low inflation and low unemployment. “Monetary policy can impact interest rates, which in turn influence stock market valuations,” Blair said.
It’s also important to understand that the stock market is not the same thing as the economy. That’s why it’s possible for us to currently be in a recession while the stock market soars. The market is reflecting the optimism investors have for the future, particularly the future of corporate America. Other economic indicators, such as the unemployment rate and GDP, paint a more realistic ― and grim ― picture.
Plus, though the numbers favor Democrats, correlation doesn’t necessarily mean causation. And policies that may have a significant and long-lasting impact take a while to propagate through the economy, sometimes allowing the next administration to take credit. “This blurs the line between who should take credit for what,” said Dejan Ilijevski, an investment adviser at Sabela Capital Markets.
The stock market is also forward-looking, meaning that investors are already pricing in expectations about the future. Ilijevski said investors are more likely to pay close attention to the Fed over politicians.
Finally, it’s usually unexpected or unforeseen events that define the stock market during an administration ― like terrorist attacks or a global pandemic ― rather than anything an administration does.
Of course, if the president refuses to act in the face of major crises such as climate change, political instability or the coronavirus, the economy will suffer. And those effects will trickle their way into the market eventually. Many would argue that that’s the exact situation we’re facing now, which makes Biden and a Democratic administration more likely to bring about economic recovery in 2021.
According to Hamrick, the important takeaway from all this is similar to the disclosure provided by many financial service firms: Past performance is no guarantee of future results. “Since most investors look to the stock market for retirement savings, the game plan for most should be to focus on the long term to maximize their retirement security.”
Current events may cause the market to temporarily dip up and down, but over time, it trends upward, so it’s probably not a great idea to vote based on what you think will happen to stocks. Instead, consider which candidate is most interested in helping the average working American, not just their friends on Wall Street.