Ahhh, election season. The suspense, the name-calling, the scandal! This season has not delivered a single dull moment. One question in particular is which candidate will be best for our economy and our portfolios? Will DNC leaked emails, or a plagiarized speech by Melania Trump ultimately affect our stock market? It is widely believed that Republican policies are better for the economy, but history has shown that it may not be the case.
First let us examine the historical difference between parties and how economies have reacted in the past. Having a democrat in the White House correlates to higher stock prices and lower volatility. Since 1926, the average annual return for a Democratic president is 15.08 percent, while the average annual return for a Republican president is 7.88 percent.
It is also reasonable to believe that policy changes can take time to affect the economy, so while democrats have happened to have better stock markets while they are in power, it does not necessarily mean that democrats are better for the long-term economy. If we look at stock market returns with a one-year delay, we see an entirely different picture. Democratic presidents have a 12.36 percent average annual return, and Republican presidents have an 11.02 percent annual return. Very little difference between the two.
If we examine a Republican versus Democratic-led house, however, it seems a Republican-led House actually has had a slightly higher average return than with a Democratic-led house. Average returns under a republican house have been 12.17 percent, and average annual returns with a democratic led house have been 11.54 percent. Historically, the overall best performing markets have been with a Democratic president and a Republican House, with a 15 percent average annual return.
With all of this information being noted, it is important to understand a few facts about statistics and timing the stock market. Statistics are most accurate when a large sample size is used. In this case, we were only able to look back to President William McKinley, who took office in 1897, and there have only been 19 presidents to study since then.
The economy is affected by so many additional factors outside of who the president is. For example, within eight months of President Herbert Hoover taking office, the stock market had the most devastating crash in history. By the end of Hoover's term, we saw a 75 percent decline in stock market. Was the depression caused by Hoover's policies? It is possible that his reign did not help the state of the world economy, but it is unlikely that his policies were entirely to blame for the Great Depression. Other factors such as the 1929 stock market crash, the failing of over 9,000 banks, and a loose monetary policy in the 1920's certainly were factors contributing to the depression.
Another, more recent example is of our sitting president, Barack Obama. The S&P 500 Index has gone up 154 percent since he took office in January of 2009, and we have seen a rising market for seven years in a row.
The question remains, is this because of the president's economic policies, or were other things at play here? Well, we were recovering from the worst banking crises in history. Markets tend to rally during a recovery. Then there was the Federal Reserve, which used monetary policy to add more than $3.5 Trillion into the economy in order to create liquidity in the markets. Other than nominating Janet Yellen as the Chair of the Federal Reserve, the president does not make monetary policy decisions. Some other factors that contributed to a rising market were stock buybacks, strong balance sheets for individual companies, and low interest rates. Factors leading to the post-2008 crisis recovery were not limited to decisions by the president alone. There were many other contributions in play here.
There is one fact that we can all rely on this election season, and that is that market volatility increases with uncertainty. This election surely has no clear winner, and that fact alone will rattle markets, especially in the coming months. The more confused voters feel about who the clear winner will be, the more we will be affected by this volatility. Furthermore, it seems that the first year of a president's term tends to be the most volatile, and is correlated with the lowest stock market return of their term.
Due to a relatively short history of both presidential elections and the U.S. stock market, we are prevented from seeing true statistical significance in the correlation between political parties and stock market performance.
The wisest decision when building or adjusting your portfolio is to do what you should always do. Remember that you are invested in the market for the long run (if you are not, then you should not be invested at all), and don't let political changes and market volatility sway you from that decision. The overall economy and stock market are affected by so many different factors, that the best option is to allow your portfolios to fluctuate and not try to time the market. The biggest risk in investing is missing out on rally days. An investor that has been invested for a 20-year period (12/31/1993 through 12/31/2013) has resulted in a 9.2 percent return per year. If that same investor missed out on the 30 best trading days of that period, their portfolio remained flat.
Sitting in cash during rally days can be catastrophic to a portfolio, so don't let the election talk, the volatility, or even the prospect of a reality TV star running our country sway you from the fact that long term investors do better than market timers.
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