The U.S. stock market is close to its record highs, as presented by the chart capturing the performance of the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) and SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) that track the performance of the most famous stock market indices, S&P 500 and the Dow Jones Industrial Average, respectively. Although the U.S. stock market did very well over the last 8 years, the strong growth was more supported by the expansive monetary policy than by the performance of the U.S. economy. Some of the economists and financial analysts expect that the stock market will keep on growing, as the Fed has no other option than to maintain a loose monetary policy. On the other hand, some of them expect that it takes only one or two negative events and the stock market will crash.
The upcoming U.S. presidential election is supposed to be one of the most important events that is able to affect the direction of the stock markets over the coming years. The election will take place next month, on November 8. The recent polls show that the Democrat candidate Hillary Clinton is in the lead before the Republican candidate Donald Trump, although the difference between the two candidates is negligible. As a result, a period of uncertainty and increased volatility should be expected.
Source: The New York Times
A common knowledge says that the U.S. stock market tends to do better when a Democrat occupies the White House. However, there can also be found some time periods when stock markets did very well also under Republican presidents. For example, during the presidencies of W.G. Harding and C. Coolidge (1921-1928), the Dow Jones Industrial Average grew by 320% and during the presidency of R. Reagan (1981-1988), it grew by 127%. On the other hand, when H. Hoover ruled the USA (1929-1932), the benchmark stock index lost 80% of value.
The chart below shows comparison of the average daily returns of the Dow Jones Industrial Average and S&P 500 during Democrat and Republican administrations. Over the 1900-2016 time period, there were 11 Republican (T. Roosevelt, Taft, Harding, Coolidge, Hoover, Eisenhower, Nixon, Ford, Reagan, G.H.W. Bush, G.W. Bush) and 8 Democrat presidents (Wilson, F.D. Roosevelt, Truman, Kennedy, Johnson, Carter, Clinton, Obama). The Democrats ruled for 56 years and the Republicans ruled for 61 years. The Dow Jones Industrial Average recorded a 0.03245% average daily gain when a Democrat president ruled the USA, compared to a 0.01748% average daily gain recorded under Republican presidents.
Source: own processing
Since 1957, when the S&P 500 was established, there were 6 Republican and 5 Democrat presidents. The Democrats ruled for 28 years and the Republicans ruled for 32 years. Under the Democrat presidents, the S&P 500 recorded an average daily gain of 0.04559% while under the Republican presidents, the average daily gain climbed only to 0.01849%. Statistical tests show that in the case of the Dow Jones Industrial Average as well as in the case of the S&P 500, the differences between returns are not statistically significant.
The charts below show annual returns of the Dow Jones Industrial Average and S&P 500 over the 1900-2016 and 1957-2016 time period, respectively. The data show that the stock market returns over the Republican tenures were negatively affected by the Great Depression and by the market crashes in 1973, 1974 and 2008. On the other hand, the results of the Democrat presidents were positively affected by an incredible 80% stock market growth in 1915, by the post-depression recovery in the late 1930s and by the inflating technology bubble in the second half of the 1990s.
Source: own processing
Source: own processing
The table below shows the average annual returns of the Dow Jones Industrial Average and the S&P 500 over the whole time periods (1900-2016 and 1957-2016, respectively), as well as the average annual returns after the 5 highest return years and the 5 lowest return years were excluded from the consideration.
Source: own processing
Taking into account the whole time periods, the Dow Jones Industrial Average did much better during tenures of the Democrat presidents (8.71% to 5.74%). The same applies for the S&P 500 (11.31% to 4.97%). After the 5 best years (1908, 1915, 1928, 1933 and 1954 for DJIA and 1958, 1975, 1995, 1997 and 2013 for S&P 500) were excluded, the results are still better for the Democrat presidents (6.29% to 3.62% and 8.88% to 2.99%). After the exclusion of the 5 weakest years (1907, 1920, 1930, 1931 and 2008 for DJIA and 1957, 1973, 1974, 2002 and 2008 for S&P 500), the results are still in favor of the Democrat presidents, however the differences are significantly smaller (9.47% to 8.92% and 11.31% to 10.46%).
It is also interesting that the Dow Jones Industrial Average recorded positive returns in 76 out of the last 116 years (or in 65.5% of cases). The Republican presidents experienced a positive stock market return in 37 out of 61 years (60.7% of cases) while the Democrat presidents experienced positive stock market returns in 39 out of 56 years (69.9% of cases). It means that there is a slightly higher probability that a given year will be positive for the stock market, when a Democrat president occupies the White House.
The history shows that the U.S. stock markets tend to do better under Democrat presidents. This conclusion is valid also for data series adjusted for the most extreme values. On the other hand, it is important to note that we are not talking about a physical law and there can be found time periods when the stock markets did very well under Republican presidents as well as time periods when the stock markets did relatively poor under Democrat presidents.
According to the polls, the election should be close, which means that the SPY and DIA investors should be prepared for a period of increased volatility. It is able to expect that due to the historical experiences, the victory of Clinton will be welcomed positively by the stock markets, while the victory of Trump will lead to a market decline. But as the data show, the average stock market returns were positive regardless of the political party of the president, and the differences between returns reached under Democrat and under Republican presidents are not statistically significant. It means that the direct impact of the election's results will be only short-lived. In the long term, the actual policies applied by the president will be more important than the party of the president. SPY and DIA investors should pay more attention to other factors, such as the December Fed decision regarding the interest rates policy, the problems surrounding Deutsche Bank (NYSE:DB) or the upcoming earnings season.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.