Presidents and Profits: How the Stock Market Responds to Party Politics

In this article, Bryan Routledge explores the relationship between presidential administrations and stock market performance. By analyzing data from 1953 to the present, he examines how market returns and volatility have varied under Democratic and Republican presidents.

The president has a significant role in shaping policies that influence the economy—things like taxes, regulation, and foreign relations. These policies can impact company profits and, by extension, stock prices since stocks are valued based on expectations of future profits. But of course, the economy and stock market are complex, with many factors beyond government policy influencing why prices increase or decrease.

But with the election fast approaching, we might wonder: Does the stock market perform better under presidents from one party or another? Here is a look at the data.

The data is monthly returns for “the stock market.” The measure includes nearly all publicly traded companies in the U.S. (a value-weighted portfolio of all stocks on the NYSE and NASDAQ). For “bond” returns, we use the return on a one-month U.S. Government Treasury Bond). For the timing of each presidency, we have the dates each president was in office, starting from inauguration day. (The results are similar if we use election day instead.)

Performance

A helpful way to illustrate stock market returns is the "invest one dollar" plot that tracks the wealth from a portfolio that starts in January 1953 with $1. Here, the investment strategy of interest switches between stocks and bonds based on the president’s party. For the "R.Democratic" portfolio, put the wealth in stocks during Democratic administrations and in bonds during Republican ones. The "R.Republican" approach would be the reverse. Also interesting to consider is a portfolio is a portfolio that just holds stocks, R.stock, and one that just holds bonds, R.bond.

The $1 from 1953 grew to $83.64 in R.republican and $388.50 in R.democratic. Much of that difference is due to only two periods: the dot-com boom in the late 1990’s (President Clinton era) and the dot-com bust in 2000 (President G.W. Bush), and the financial crisis period of 2007-2008 (President Bush) and then the stock market bull that followed (President Obama).

It is hard to draw a strong conclusion here. First, these are just two events, so this is not “big data.” Second, even if you believe presidential policy was important to the dot-com era or financial crisis, the timing of the stock market is fickle. Had the dot-com bubble burst a few months sooner, or the financial crisis arrived a few months later, they would have fallen into the time of a different administration, and the results would have been substantially different.

Most interesting to me (a finance professor) is the “stocks for the long run” advice holds. Instead of R.republican or R.democratic, the portfolio that is 100% stocks regardless of the president's party, R.stock, grows to $1,724.81!

Risk

Stock market performance measures the increase (or decrease) in wealth. We can also look at the variability or volatility of the stock market. The stock market goes up or down daily, and that direction is hard to predict. The amount it goes up or down is the volatility (standard deviation of the return). In the same spirit as our previous plot, does the volatility of stock prices differ across presidential parties?

The plot shown here estimates volatility by calculating the standard deviation of daily returns over 30 trading days. The volatility is scaled to be per year.

The average volatility is similar across Democratic and Republican administrations (13.0% versus 13.4% – a negligible difference). The three largest spikes, which happen to coincide with Republican administrations, are the period around the stock market crash of October 1987, the period around the financial crisis in the fall of 2008, and the recent experience with Covid-19 in March 2020. The spikes occurring in Democratic administrations are the Cuban Missile Crisis in October 1962, the dot-com era in 1999-2000, and the later period of the financial crisis in early 2009.

Conclusions (Cautions!)

We need to be careful not to focus only on the stock market as a measure of economic well-being. Many important areas, such as housing, small businesses, and new startups, don’t appear on the stock exchange. Even as a gauge of the economy, the stock market can be misleading— "The stock market predicted nine of the last five recessions" is the famous quote.

The biggest caution is that our data is limited. The 872 months of data since 1953 covering just twelve administrations is a small slice of history. Events like the pandemic in 2020 or the arrival of AI technologies like ChatGPT remind us that the economy is not stationary. As policies, events, or leadership styles diverge from past norms, the lessons drawn from historical data are less applicable to the present.

Finally, you should vote. There is a lot at stake. That what is at stake is not measured by stock prices does not make it less important. You should vote.