Political Parties and Stock Market Performance

The value of the Stock Market changes as confidence in the future of the nation’s economy changes. When investors are optimistic about the future, they buy stocks and therefore cause the Stock Market indices to rise. Conversely, during time of pessimism and uncertainty, these indices decline. In the past year, we have seen a huge drop in the Stock Market. As measured by the Dow Jones Industrial Average, the Stock Market has lost as much as 40% of its value from the high reached in October 2007.

Because investors look forward, the Stock Market usually begins to rise well before the economy recovers. Let’s look at the last recession in 2001. The National Bureau of Economic Research (NBER) announced at the end of November of that year that a recession had begun in March. However, it wasn’t until March 2003 that the NBER announced that the “official” end of the recession had been November 2001.

So, the recession lasted from March through November. What did the Stock Market do? It reached a peak in May, actually several weeks after the recession began. The Market reached a minimum in September: during the drop, it lost 27% of its value. From that bottom, the Market rose rapidly, so that by the time the recession ended, it had recouped more than half of the loss.

This is not atypical. The Market often rises even after it is later determined that a recession has begun, and after it drops, it often begins to rise before the recession ends. In essence, investors are anticipating the recession’s end and begin to buy stocks.

Stock market activity, therefore, is a leading indicator of economic activity: it responds to anticipation for the future.

How has the Political Party in Power affected the movement of the Stock Market? I examined the last 20 Presidential administrations, which have encompassed 40 sessions of Congress. I assigned each Congress as either Democratic or Republican if the Party controlled both houses, or “split” if each Party controlled one of the houses. I then examined the possible combinations of Party in the White House and Party in control of Congress and determined the average change in the Stock Market during the times when each combination was in place.

First, let’s look at the Political Party in the White House. Referring to the Table to the left, you’ll see that the Stock Market went up an average of 15.6% when Democrats held the Presidency, and went up 0.9% when a Republican held the post. This is a substantial difference.

Finer analysis reveals that when a Democrat occupies the White House, the Stock Market does better when Republicans control the Congress. During such times (4 sessions of Congress), the Market went up an average of 25.8% compared to an average rise of 13.0% when Democrats controlled Congress in addition to the White House (16 sessions). At no time did a Democrat occupy the Presidency when control of Congress was split.

When a Republican was in the White house, The Stock Market performed only slightly better with Democratic control of Congress (+ 4.8%, 11 sessions) than when Republicans controlled Capital Hill (+4.1%, 4 sessions). By far the worst Stock Market performance occurred when a Republican was in the White House and the control of Congress was split between the Parties (-10.0%, 5 sessions).

Certainly the past is not a guarantee of the future, but if the pattern of the last 80 years continues forward, we will have a robust Stock Market going forward. Let’s hope that’s true.