How Does the Market Perform Under Democratic or GOP Rule?

The relationship between elections and stock returns has always been problematic. Is there a cause and an effect? No amount of polling can nail down an answer. But whether it’s coincidental or not, who wins in Washington seems to have a resonance with market performance.

To be sure, former President Donald Trump, the Republican nominee, stands for higher tariffs, tax cuts, immigration crackdowns and skepticism toward international alliances, in particular NATO. President Joe Biden, thus far the apparent Democrat standard-bearer, has different takes on those topics, often the direct opposite.

These are “all big issues on which both parties disagree and that can affect the economy and financial markets,” wrote Jeff Buchbinder, chief equity analyst at LPL Financial, in a research paper on politics and the market in this election year.

The S&P 500 under Trump was outpacing its performance under Biden for the first three years of each president’s term, a Yahoo Finance analysis found. But then the pandemic hit at the beginning of Trump’s last year in office, depressing the market. Thus, for each man, through March of their fourth years, the index was up 138% for Biden and 109% for Trump.

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One finding of the LPL study: If you invested $100,000 in the S&P 500 back in 1950, yet stayed invested solely during Democratic presidential years, you would have seen that grow to $3.1 million today (not counting dividends). During GOP administrations, that figure would just be $1.0 million. Staying invested for the entire 74-year span would bring you $32.6 million.

One could chalk those huge differences up to “the adage of time in the market beats timing the market,” Buchbinder observed.

Another factor is that, for whatever reason, since World War II, the average Democratic four-year presidential term has had a recession in just one of its 16 quarters, versus five quarters for the average Republican term, according to a study released in March by the Harvard Kennedy School of Government.

What about split government: a Democrat in the White House with Republicans controlling both houses of Congress, and vice versa? The average annual return on the S&P 500 was 6.7% and 4.9%, respectively, the report found. Only a small difference. The paper did not sketch out the outcomes when just one house was under control of the president’s party.

Of course, an argument exists that split government is good for stocks. Per a study by financial planning firm Van Leeuwen and Co., since 1948, the Dow Jones Industrial Average returned a yearly 8.3% when one party controlled both ends of Pennsylvania Avenue and 12.9% with split government.

In mid-July, after Trump’s escape from an assassination attempt and as the Republican National Convention gets under way, the ex-president is ahead in the polls: Real Clear Politics, which amalgamates election surveys, has Trump leading Biden by 2.7 percentage points, wider than the 0.9-point Trump edge a month ago.

That said, what the polls say in summer has a way of turning out quite different in early November. So no one can be sure—of the outcome or of its effect on the market.