Aug. 9, 2004 — As the presidential campaign heats up, many investors believe Republican presidencies are better for the market. After all, a lot of Wall Streeters are staunch Republicans, fearful of Democrats clamping down on corporate profits and raising taxes.
But in fact, investors are more likely to have happier days under Democratic administrations than under Republican administrations, based on investment returns since 1945. Since then, the S&P 500-stock index rose 10.7%, annualized under Democratic administrations, versus a 7.6% gain underRepublican administrations.
However, the re-election of presidential incumbents over challengers boosts the market more in first post-election years. In first post-election years since 1945, the S&P 500 was up 12.9%, on average, when incumbents won, versus a 3.2% loss when incumbents lost.
The reasons behind these election/market dynamics are unclear. Sam Stovall, Standard & Poor’s chief investment strategist, notes that economic recessions have occurred more frequently in Republications administrations. Since June 1899, two out of three recessions have begun under Republican presidents.
Another interesting pattern is that recessions tend to occur early in presidential administrations and to hit Republican administrations harder. The frequency of recessions may account for market underperformance under Republican presidents, but Stovall cautions that a direct connection between the two is unclear.