Do Financial Markets Favor A Republican Or Democratic President?

Nov.11.12 | About: SPDR S&P (SPY)

U.S. financial markets favor a Republican president over a Democratic president.

Has this sentiment stood the test of time? Do financial markets care whether the president-elect is a Democrat or a Republican? How have financial markets behaved in the past after the announcement of the next U.S. president? And finally, can one spot a pattern in the performance of financial markets based on the president's party affiliation? More specifically, do financial markets fare better under a Republican president or under a Democratic president?

To answer all these questions, I turned to history and generated the historical performance of the S&P 500 (NYSEARCA:SPY) since 1952. I also turned to Wikipedia to get a list of presidents and their party affiliation. Between 1952 and 2012, the U.S. has elected 16 presidents, with Republican presidents outnumbering their Democratic counterparts by two in occupying the White House (see table below):

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Source: AllThingsAnalytics

To understand whether financial markets favored a Republican president over a Democratic president, I generated a screen of 1-day, 1-week, 4-week, 12-week, 52-week returns and the presidency term ("term") returns after elections (see table above.) Looking at the one day return, there was no clear indication whether markets favored one party or the other. Financial markets welcomed Ronald Reagan, a Republican, by sending the S&P 500 up 1.77%, which is the highest one-day return among all the 16 presidential election events. Markets also cheered the reelection of Bill Clinton with a one-day return of 1.46% after the announcement of the president-elect.

With one-day returns of -5.27% and -2.37% in 2008 and 2012, respectively, President Obama is not much favored by financial markets. Now, one can argue that October 2008 was a terrible period for anyone to be elected as the president because of the ongoing crash in financial markets that led to the great recession (see chart below). Nonetheless, markets also didn't like Obama's reelection (the S&P 500 was down 2.37% following the election day) which leads to a status quo in Washington. Combine that with all the ongoing macro concerns, including the euro debt crisis and the already unraveling fiscal cliff; investors have become very jittery in the past couple of days.

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Source: AllThingsAnalytics

Now, to overcome the short-term bias in financial market's reaction, let's review other period's returns (see table above.) There are plenty of interesting observations one can make. For example, under both of Clinton's (Democrat) presidencies, financial markets boomed, with returns of 56% and 111% over the 200 weeks after election day. Eisenhower's (Republican) presidency came second with returns of 95% and 19% for the two terms, respectively. The Reagan era was followed by Bush Sr.'s term. This period also produced hefty gains for investors, with returns of 28%, 56% and 49%, respectively, under their terms. Again, there is no clear indication whether financial markets favored one party over the other during a president's term in the office, but financial markets definitely fared well under a Republican president prior to 2000.

Bush Jr. (Republican) inherited the dot-com crash, oversaw the biggest expansion in U.S. public debt (see chart below) and observed the epic housing crisis of 2007-2008. Financial markets yielded returns of -22% and 13% during Bush's two terms of presidency; pretty poor for a Republican president who unleashed all the expansionary polices on the U.S. economy. Under Bush's 8 year presidency, U.S. public debt doubled from $5.6 trillion to $10 trillion. Obama added almost the same level of debt in just 4 years and took U.S. public debt from $10 trillion to $14.2 trillion by the end of 2011.

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Source: AllThingsAnalytics

Are we living in times which have no historical precedence? It took 20 years for U.S. public debt to rise from the $1 trillion level to the $5.5 trillion level (see side chart). It then just took 11 short years for U.S. public debt to rise to the $14 trillion level. From year 1980 to 2000, the S&P 500 appreciated by 1276% (from 105 at the start of 1980 to 1455 at the start of 2000). An astonishing rise! Also astonishing is the fact that since 2000, until the present, the S&P 500 has been down -5%. Has the mammoth economic expansion of the 1980s and 1990s run its course and now debt is the only route left to sustain U.S. economy? Let's leave this discussion for another blog.

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Source: Wikipedia

Financial markets care less which party's candidate is elected for the White House. Markets focus more on the economic policies that the president will enact. However, all the rhetoric and party ideology does take a toll on financial markets, as evident in financial markets' immediate reaction similar to the one we are observing right now. Hopefully, Congress and the President will put the rhetoric aside and break the impasse on the already unraveling fiscal cliff.

This blog has benefited from discussions with Jens Doerpmund, Ryan Leask and Rajani Aswani on this topic.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: All numbers are approximate and the underlying analysis is preliminary. This blog is not intended to offer any investment advice.