Does Party Matter to the Markets?

We’ve argued lately the S&P 500 could soon eclipse its 2000 and 2007 highs (of 1527 and 1565, respectively), but there’s another looming target few are discussing: S&P 1443.

Why is 1443 significant? Because a close above this figure at next January’s inauguration would make Barack Obama’s presidential term the second most profitable for stock investors since 1928, trailing only the +162% rebound off Great Depression lows in FDR’s first term.

DOES PARTY MATTER?

Barring a near-term collapse, Barack Obama’s term now stands to rank among the best handful of terms in modern stock market history (which he curiously fails to list among his important first-term accomplishments). The three best previous presidential terms for stock prices also occurred with Democrats at the helm. (Again, though, don’t expect the party to trumpet that fact.) Meanwhile, among the five presidential terms associated with a cumulative loss in the S&P 500, four occurred under Republicans (with “W” appearing on the list two times).

The summary table of the best and worst stock markets by term certainly favors the Democrats. But when all terms are considered, the numbers are a wash. The median S&P 500 price gain during a Democratic presidential term is 27.5%, compared with 27.3% for Republican terms.

Investors shouldn’t base their vote on these results, but they might rethink their knee-jerk assumptions on the relationship between party affiliation and market performance. Republicans might “talk a good game” with investors, but their policies are either:

  • fully discounted by markets before their candidate takes office;
  • overwhelmed by larger cyclical forces; or
  • fundamentally indistinguishable from the Democrats'.

In practice, all three factors are likely at work.

THE ELECTION

We’ve fielded increasing requests this year for research into political trends. We’ve obliged in some cases, but would warn readers we have no plans to follow CNBC’s decision to drop all investment work in favor of political commentary.

Could a Romney victory spark a major market rally? I’m skeptical. To be candid, I’m not even clear on the direction of “causality” between elections and the stock market. Conservatives hopeful for a post-Romney victory rally might pause to consider the role the rally to date might play in getting Obama reelected.

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