After an incredibly long, emotionally-charged campaign, the 2016 election is finally over. The GOP has swept and will control the White House and both Houses of Congress for at least the next two years. Investors are understandably curious, and perhaps a bit nervous, about what the results may mean for the economy, markets and their portfolio, and there is no shortage of commentary and opinion available on the subject. But here at Vickery, as evidence-based investors, we shout “Show us the data!”
Before reviewing the research, it’s important to keep three things in mind:
- The market effectively incorporates new information very quickly into security prices. As the realization of Trump’s surprising victory became clear, markets initially became very volatile, falling 5% at one point, but nearly all of the turmoil occurred overnight in the relatively illiquid futures market. By the end of the next day, the S&P500 had recovered all of its overnight losses and ended up 1.1% from the day before. The speed of the market moves was breathtaking, and only the luckiest and most nimble of traders could have profited from such volatility.
- One political party will always appear to have the upper hand in any study of past results, even if the outcomes were purely random (meaning that economic and market performance has no correlation to whether Democrats or Republicans control the various branches of government). Why? Because this kind of head-to head comparison between two entities, by definition, has to produce a “winner” and a “loser”. But this fact alone does not prove causation, or indicate in any way whether one party’s policies had a meaningful impact on the outcome.
- Even if we examine stock market performance and GDP growth for all 4-year presidential terms during the entire post-WWII period, there are only 17 observations in total. This is an exceptionally tiny dataset and makes the task of drawing statistically significant conclusions extraordinarily difficult. We should take the findings of any study with a large grain of salt.
With those caveats in mind, what does the data tell us about how the economy and the stock market fare under Democrat vs. Republican administrations? In a November 2013 paper titled “Presidents and the Economy: A Forensic Investigation”, Princeton economists Alan Blinder and Mark Watson attempt to answer this question with a thorough analysis. On the economy, they find that the Democrats come out notably ahead, with real annual GDP growing 1.8% faster on average than under Republican presidents. Corporate profit growth and total nonfarm employment have also done better under Democrats historically. However, the authors attribute this result largely to “good luck” as the Democrat’s macroeconomic policy prescriptions were not significantly different than those put forth by Republicans. As further evidence for their hypothesis, the authors point out that Republican administrations have been particularly unlucky when it comes to negative oil shocks, and have endured unexpected spikes in oil prices that slowed economic growth during their terms.
The Democrats also appear to have the edge on the stock market performance. Since 1948, the average annual return on the S&P 500 has been 5.4% higher when a Democrat resides in the White House. The difference sounds quite large at first glance, but due to the high volatility of stock market returns and the low number of total observations, the difference was not statistically significant.
While the conclusions of this study are intriguing, due to the high level of uncertainty and random luck involved, they do not suggest a particular course of action that investors should take based on the results of our most recent election. In all likelihood, the market has largely discounted the effects of the election into prices, and any short-term trading opportunities have already passed. Instead, we should remain focused on long-term outcomes. With luck, we’ll avoid an oil shock in the next four years as well.