What Does the US Presidential Election Mean for Markets?
LONDON, September 4, 2012 /PRNewswire/ --
US market performance since 1900: Republicans versus Democrats
Although the Republicans are widely seen as being generally more favourable to business, since 1900, stock markets have actually performed better under Democratic presidents.
Although the Republicans have spent more time in office over the last 112 years, the Democrats have posted an average return over month (0.73% to 0.38%) and average monthly return over the same month a year earlier (8.00% to 6.37%).
Normally one would expect higher returns to come with higher risk but under the Democrats, risk as measured by the standard deviation has been lower based on both monthly (5.22% vs 5.56%) and yearly (20.25% vs 22.13%) volatility.
Months Total Avg Ann Avg Mon
President Party In Office Return Return Return
William McKinley Republican 20 10.61% 6.36% 0.69%
Theodore Roosevelt Republican 90 10.96% 1.46% 0.28%
William Taft Republican 48 (1.23%) (0.31%) 0.04%
Woodrow Wilson Democratic 96 (7.50%) (0.94%) 0.12%
Warren Harding Republican 29 16.22% 6.71% 0.60%
Calvin Coolidge Republican 67 268.60% 48.11% 2.08%
Herbert Hoover Republican 48 (83.91%) (20.98%) (2.93%)
Franklin Roosevelt Democratic 145 201.96% 16.71% 1.00%
Harry Truman Democratic 93 88.96% 11.48% 0.75%
Dwight Eisenhower Republican 96 111.34% 13.92% 0.84%
John Kennedy Democratic 34 22.76% 8.03% 0.68%
Lyndon Johnson Democratic 62 24.90% 4.82% 0.43%
Richard Nixon Republican 67 (19.72%) (3.53%) (0.24%)
Gerald Ford Republican 29 32.63% 13.50% 1.15%
James Carter Democratic 48 (4.08%) (1.02%) (0.00%)
Ronald Reagan Republican 96 125.13% 15.64% 0.97%
George H Bush Republican 48 52.26% 13.07% 0.96%
William Clinton Democratic 96 226.75% 28.34% 1.33%
George W Bush Republican 96 (18.64%) (2.33%) (0.13%)
Barack Obama Democratic 43 48.22% 13.46% 1.04%
Total Republicans 734 332.09% 5.43% 0.38%
Total Democrats 617 787.31% 15.31% 0.73%
Table continues
Monthly Monthly Mon Avg Year Year
President Std Dev Ret/Rsk Ovr Year Std Dev Ret/ Rsk
William McKinley 5.72% 0.12 n/a n/a n/a
Theodore Roosevelt 5.60% 0.05 5.39% 27.68% 0.19
William Taft 3.75% 0.01 3.98% 27.73% 0.14
Woodrow Wilson 6.23% 0.02 1.83% 23.35% 0.08
Warren Harding 4.10% 0.15 8.04% 21.51% 0.37
Calvin Coolidge 4.74% 0.44 19.73% 16.63% 1.19
Herbert Hoover 12.65% (0.23) (24.04%) 34.87% (0.69)
Franklin Roosevelt 6.92% 0.14 11.48% 33.43% 0.34
Harry Truman 3.60% 0.21 8.91% 12.73% 0.70
Dwight Eisenhower 3.42% 0.25 11.85% 16.26% 0.73
John Kennedy 3.98% 0.17 5.71% 13.95% 0.41
Lyndon Johnson 3.82% 0.11 5.64% 10.59% 0.53
Richard Nixon 4.05% (0.06) (0.19%) 13.19% (0.01)
Gerald Ford 5.92% 0.19 8.65% 22.08% 0.39
James Carter 4.08% (0.00) (1.94%) 9.35% (0.21)
Ronald Reagan 4.92% 0.20 12.90% 19.79% 0.65
George H Bush 3.96% 0.24 12.67% 9.63% 1.32
William Clinton 4.09% 0.32 16.46% 12.12% 1.36
George W Bush 4.18% (0.03) 1.51% 13.88% 0.11
Barack Obama 4.80% 0.22 5.42% 20.65% 0.26
Total 5.56% 0.07 6.37% 22.13% 0.29
Total 5.22% 0.14 8.00% 20.25% 0.39
How does the current administration stack up?
Dividing the return for each President by the risk gives an indication of how markets have performed under each President. Interestingly, many of the overall more successful Presidencies have also performed well under this measure, while many of the Presidencies widely considered to be less successful find themselves at the bottom of the table.
Interestingly, Presidents Reagan and both Roosevelts find themselves a bit lower on the table than might be expected while the first President Bush had a very strong market performance despite not winning a second term.
In terms of market performance, the first term of President Obama has been very successful, ranking fifth overall and second among Democrats in terms of return relative to risk.
Monthly
Return/Risk
Calvin Coolidge Republican 0.44
William Clinton Democratic 0.32
Dwight Eisenhower Republican 0.25
George H Bush Republican 0.24
Barack Obama Democratic 0.22
Harry Truman Democratic 0.21
Ronald Reagan Republican 0.20
Gerald Ford Republican 0.19
John Kennedy Democratic 0.17
Warren Harding Republican 0.15
Franklin Roosevelt Democratic 0.14
William McKinley Republican 0.12
Lyndon Johnson Democratic 0.11
Theodore Roosevelt Republican 0.05
Woodrow Wilson Democratic 0.02
William Taft Republican 0.01
James Carter Democratic 0.00
George W Bush Republican (0.03)
Richard Nixon Republican (0.06)
Herbert Hoover Republican (0.23)
Average 0.13
So what does this mean for President Obama's re-election chances? In the chart below, we compare the return relative to risk for first-term presidents that sought re-election. In this table we have only included those Presidents who started their first term by being elected into office. Those who took over mid-term from another President have been excluded.
The results show that in general, incumbents with successful market performance tend to be rewarded with another term while those with particularly poor performance tend to be thrown out of office. The main exceptions were the two President Bushes with the first losing his re-election bid despite a strong market performance and the second winning re-election despite weak market performance.
President Obama's returns to date have been near the top of the Presidential league which normally would suggest market conditions favour re-election.
First Term Re-Election Bids Monthly Election
Return/Risk Result
William Clinton Democrat 0.51 Won
Franklin Roosevelt Democrat 0.39 Won
Dwight Eisenhower Republican 0.34 Won
George H Bush Republican 0.24 Lost
Barack Obama Democrat 0.22
Ronald Reagan Republican 0.13 Won
Woodrow Wilson Democrat 0.07 Won
Richard Nixon Republican 0.06 Won
George W Bush Republican 0.02 Won
William Taft Republican 0.01 Lost
James Carter Democrat -0.01 Lost
Herbert Hoover Republican -0.23 Lost
This election is all about the economy and the size of Government
In case there was any lingering doubt, the addition of Rep. Paul Ryan to the US Republican ticket means that the economy and the role of government within it is likely to be the key point of discussion this election. Mr. Ryan has been one of the key figures in the Grand Old Party in the ongoing spending debate.
This election features a clear choice between Republicans looking to lower taxes and cut spending and Democrats who have been in favour of a bigger role for government and selectively raising taxes to pay for programs.
Areas related to this debate that may remain battlegrounds and could impact stocks include support/opposition to Obamacare, energy policy (which includes decisions on whether or not to allow drilling and/or pipelines in areas where there is opposition, and alternative energy investment/subsidies) and defense spending.
The ongoing debt crisis in Europe indicates that the days of funding spending or tax reductions through borrowing is coming to an end in many countries around the world. This leaves the public with a referendum on the question of not only how much government do they want but also how to pay for it.
This clear cut choice could set the trend for government spending for a generation, suggesting that this election may become a major turning point in US history.
20-Year cycles suggest this year could be a big turning point
One of the most glaring questions from the analysis of Presidential market returns is why the first President Bush lost in 1992 when his market performance was so strong. It appears that his bid was caught up in a stronger generational cycle of political change.
Over the last century, a cycle of major shifts in power and policy occurring more or less every twenty years has been playing out. Throughout the twentieth century, these cycles tended to come to a head in election years ending in 2 which coincided with major changes in political direction.
Election Years Ending In 2
Year Result
1912 Wilson (D) ends 16 years of Republican rule (3 presidents)
1932 F Roosevelt (D) ends 12 years of Republican rule (3 presidents)
1952 Eisenhower R) ends 20 years of Democratic Rule (2 presidents)
1972 Nixon R) elected to a second term
1992 Clinton (D) ends 12 years of Republican rule (2 presidents)
2012
Market Performance In Election Years ending in 2 (to Oct 31)
1 year 6 months 3 months 1 month
before before before before
1912 11.11% 0.00% 1.12% (4.26%)
1932 (41.90%) 8.93% 12.96% (14.08%)
1952 2.67% 4.67% (3.58%) (0.37%)
1972 13.83% 0.10% 3.35% 0.21%
1992 5.12% (3.96%) (4.92%) (1.38%)
average (1.84%) 1.95% 1.79% (3.98%)
1 month 3 months 6 months 1 year 2 years 3 years
after after after after after after
1912 1.11% (7.78%) (13.33%) (13.33%) (21.11%) 5.56%
1932 (8.20%) (1.64%) 26.23% 44.26% 52.46% 127.87%
1952 5.20% 7.43% 1.86% 2.23% 30.86% 68.77%
1972 6.60% 4.61% (3.56%) 0.10% (10.99%) (35.50%)
1992 2.45% 2.60% 6.23% 14.07% 21.14% 47.40%
2012
average 1.43% 1.05% 3.49% 9.47% 14.47% 42.82%
The results show that in four of the five elections, power changed between parties. In three of the five cases (1932, 1952, 1992), markets rose substantially in the ensuing years. Two of those periods were Democrat wins versus one Republican. The 1912 election was followed by large declines due to the outbreak of World War I but had recovered by the three-year mark.
The one election where the party was re-elected (1972) was followed by the severe 1973-1974 bear market and tremendous political instability.
Considering that we are only four years on from the even worse generational bear market of 2007-2009 and still digging out from it, a repeat of the post-1972 experience should the Democrats win appears unlikely.
For further analysis on the US election and market impacts, please click here
Notes to Editors
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The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Written by Colin Cieszynski (Senior Market Analyst at CMC Markets, Canada)
SOURCE CMC Markets
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