The two political parties in the United States differ markedly in their views about economic policy. This has led many within the financial services industry to think that if one of the parties is in power, that the economy and particularly the stock market will perform better. I examined this empirically by looking at the performance of the Dow Jones Industrial Average (DJIA), as a proxy for the market, and the political party in control of the White House.
I began by obtaining the value the DJIA on the first day of every year from Yahoo’s Finance website. Their data set begins in 1929. Then I examined how the market performed each year when Democrats and Republicans were in control of the White House.
Conveniently, this period has spanned a time when there were an equal number of years when each party was in power. The average change in the DJIA under Republican Presidents was +2.8%, while the average with Democratic Presidents was +9.7%. The market did a lot better when the Democratic Party controlled the White House. However, when I considered this result, I thought of an objection that one might have to this approach: I attributed the market performance of the year to whoever was in the White for that year. One might argue that the effect of any differences in policy might take a year to take effect. I also thought that the uncertainty that is inherent in a Presidential election might also detract from the relationship between the Party in power and stock market performance.
To avoid both of these, I eliminated the first year from each of the 20 Presidential terms in the analysis. With this adjustment, I found that under Democratic Presidents, the DJIA advanced an average of 9.2%, whereas it gained an average of 5.0% with a Republican in the White House. Still, the market performed far better under Democratic Presidents.
Again, I tried to consider objections that might be made of this analysis. Although I used the largest data set available from Yahoo Financial, it did begin with the Hoover administration, which was, of course, a very poor one for the stock market. So, I redid everything with just the second half of this data set, that is, from 1969 until the present. Again, the market performed better on average, +11.3 % to 5.3%, with Democrats in the White House when all years were considered, and +13.3% to +7.9% when the first year of each four-year term was discarded.
Regardless of how I looked at this data, the stock market performed about twice as well under Democratic Presidents than under Republicans. I imagine this will come as a surprise to many.