Which Party is Better for Markets?

Election Day is coming up fast and I’ve been getting questions again about which party is best for the markets. This happens every cycle and, as is the case with a lot of questions like this, it’s good to revisit the answer. And while there’s lots one could discuss, analyze, and worry about, there is only one answer. Simply put, in the longer-term Mr. Market doesn’t really care who sits in the Oval Office.

We’ve seen many examples in recent years of the stock market continuing to rise amid social turmoil and other cultural upheavals. Higher returns during these events can seem wrong or otherwise disconnected from reality. Protests and riots in the streets and the stock market rises. Wars overseas with all the horrific imagery and the stock market rises. But markets are firmly anchored in one reality: money. Mr. Market can and does respond to news in the short-term but always comes back to his primary concern. We saw during Covid how markets lurched when news directly impacted the economy but prices recovered quickly as things calmed a bit and uncertainty waned.

Quite frankly, I find this singular focus comforting in an otherwise topsy-turvy world.

So again, what political party occupying the White House makes for happy markets? As luck would have it one of my data vendors, YCharts, recently came out with a series of charts addressing this question from a variety of angles. Here are a few that I found most interesting.

The first chart shows the performance of the S&P 500, the primary stock market benchmark tracking the 500 largest publicly traded companies in the US, beginning with the Kennedy administration in 1961. Only two administrations since, those of Nixon and George W Bush, suffered overall negative performance for the S&P 500. There certainly were cultural and political issues at play in both administrations with consequences that still linger today. But both also suffered major economic issues. With Nixon it was inflation, stagflation, and the beginnings of one of the longest bear markets in history. With Bush it was the tech bubble bursting just prior to his election and then recession, followed by the Great Recession (call it unlucky or otherwise, but that’s a rough way to begin and end an administration) but the stock market recovered fully and then some as the economic issues improved.

The second chart looks at investing along with changes in which political parties hold power. While this might seem obvious, you would have wildly underperformed the stock market if you sat on the sidelines while “the other party” held office. Still, and as you can see in the chart, Republican administrations generated lower returns than Democrats but that was heavily impacted by the Nixion-era and Bush-era issues mentioned above.

Our third chart looks at investing amid a divided, opposing, and friendly Congress. You might think the market prefers one party or the other, but what Mr. Market really prefers is gridlock unless he can get the changes he likes: lower taxes, less regulation, and more government spending. (Markets have historically liked the Republican tag team when we look back to 1950, as shown in the chart below.) This primarily has to do with investors valuing the certainty, or at least less uncertainty, that comes from a divided government. This allows investors to feel more confident in their assumptions about the trajectory of regulations, government spending, and how both impact the fair value of stock prices. Toss politicians promising (and being able to act on) sweeping change into the mix and investors tend to worry, get defensive, maybe sell shares, and so forth, again unless it’s changes preferred by Mr. Market.

Ultimately, the question about which party does better for markets is sort of a political red herring. No politician or political party should say they’re better for markets. There are far too many variables impacting this issue, some of which play out over years, to say that definitively. So instead of worrying about this question it’s better to focus on having a plan and sticking to it, pivoting when needed, but remaining invested throughout all political administrations.

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