It’s 2024 and that means we are in an election year. Between now and November we will be inundated with ads and speeches about how each party is better for the economy and your pocketbook. Logic would indicate both can’t be correct. As an advisor, I am very interested in the economy and the impact on client’s personal finances. One of the obvious ways this is reflected is the stock market. Let’s take a look to see how this has played out in recent history.
Generally, a stronger economy is reflected in better stock market performance, but it is not always in perfect alignment. The stock market tends to move ahead of the economy as a whole. The markets can move very quickly as we have seen in recent times where we have seen large moves in a very short period of time. Just take the three day period in early August when the S&P fell 6%.
In contrast, the economy just doesn’t have the ability to move that quickly. Think of it as a giant freighter or cruise ship that is trying to turn around. You may feel it in some parts of the boat right away while others may not feel the effects for quite some time. Even once the ship is righted the tail end of the boat may still need time to get fully realigned. We may see certain sectors of the economy report weaker profits or job layoffs while other areas seem to be humming along just fine. If the economy is weak enough eventually all sectors may be impacted but by the time the last area starts to feel the pain some of the first hit areas may already be starting to rebound. This may take several years to play out on the scale of an economy as large as the United States.
Let’s look at some historical data to see which party tends to fare better. The first chart we will examine shows how the S&P 500 has performed under each President going back to 1960. It so happens to work out that we havehad six Republicans and six Democrats that have held office during that time. Looking just at returns, there are two big winners here, Bill Clinton and Barack Obama, both Democrats. Ronald Reagan, a Republican finishes a solid third and Donald Trump had the best performance among one term Presidents. George W. Bush and Richard Nixon, both Republicans, were the only two Presidents who had negative returns during their times in office.
It certainly appears by looking at this that the Democrats have had better results. Kennedy and Johnson in the 60’s far outperformed Nixon and Ford in the 70’s. The Republicans did great in the 80’s but that was overshadowed by Clinton’s performance in the 90’s and Obama/Biden easily beat Bush and Trump’s results since 2000. Does this make a clear case that we are better off with a Democrat as President? I would argue no, that is probably too simplistic of a conclusion.
Each President has had to deal with their own unique set of circumstances both globally and domestically, many of which were possibly beyond their control that no doubt impacted market performance. Kennedy dealt with the height of the Cold War, LBJ had Vietnam, the 70’s had oil embargos and runaway inflation that led to 15% interest rates into the 80’s. The 2000’s brought the dot com crash, 9/11 and the Great Financial Crisis while we have seen a global pandemic in the 2020s.
There can certainly be an argument that policies from previous administrations may have led to events that impacted a subsequent administrations results. Let’s take George W. Bush who had the worst market track record. For one, it is fairly clear there was a lack of oversight or regulations that led to banks and financial institutions to take on far too much risk and leverage that resulted in the Financial Crisis. But when exactly did that start? Was that all on Bush or were the seeds for that planted prior to his taking office? The dot com crash was more a case of greedy investors and institutions driving the price of any internet related stock sky high without understanding if there was a legitimate business to back up the stock price. I would be hard pressed to put that on any President, that’s just bad timing that it took place during his term. It is far too easy to just point the finger at a sitting President and proclaim it was all their fault that a particular event happened. These can be very complicated and layered issues that take time to fester before breaking out and leaving a particular President to deal with the fallout. I am not going to pretend I am smart enough to know exactly where the blame for these issues should reside.
Another huge factor is what is going on in Congress. The President does not have the ability to just implement policies and laws all on his own. This all must be done with the cooperation of Congress. Again, here you can see that the market has performed better with a Democrat as President over this time but the big takeaway here is that the best results, regardless of which party is President, occurred when there has been a split Congress where no one party has full control.
This is my final and, I believe, most powerful chart. Our politics have become very divisive and if you listen to the talking heads, you will hear that one party is stupid and doesn’t know what they are doing while the other has all of the answers to unlocking the full potential of the American economy. This can lead some to fear that if a given party is elected everything will fall apart. I think these charts show that will likely not be the case but what if you felt so strongly that you only stayed invested while a certain party held the White House?
This shows that starting in 1950, if you had only invested when a Republican was President you would have had a 2.8% annual return and an initial investment of $10,000 would have grown to $77,000. If you had only been invested while a Democrat was in office you have had an annual return of 5.1% and that same $10,000 would have grown to $405,000. But if you had stayed invested the entire time you would have had an annual return of 8% and your initial $10,000 would now be worth over $3 million. This makes the overwhelming argument that it is far more important to stay invested over the long term instead of trying to pick and choose based on which party is in office.
The reality is the President gets far too much credit and blame for what happens under their watch for the following reasons.
· Congress is the actually body that passes new laws that will help or hurt the economy.
· The impact of new laws and regulations sometimes take years to actually be felt widespread in the economy.
· Policies from previous administrations may have positive or negative impact on what happens for the following President.
· Each President will likely deal with events beyond their control or policies
· Economies will have their own ebbs and flows that will happen regardless of who is President or what new laws are passed
A special thanks to YCharts for creating these graps and charts. This fall, I encourage you to participate in our democratic process by going out to vote. Whether the candidate or party you support wins or loses know that history shows us you will be best served with a focus on long term investing and not over reacting based on the results of a single election.
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