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Contenders and Pretenders: can President Obama’s strong stock market performance drive the Democrats to victory in 2016?

Contenders and Pretenders: can President Obama’s strong stock market performance drive the Democrats to victory in 2016?

Although the 2016 US election is still over a year away, the race to replace President Obama is already well underway. Contenders and pretenders alike are out campaigning this summer trying to establish themselves ahead of the primaries being held early next year. Colin Cieszynski looks ahead as the US gears towards the new Presidential campaign and analyses how stock markets have previously performed under presidents from the Republican and Democrat parties. Within this report Colin discusses: • Relative stock market performance under previous Republican and Democrat governments • Why markets have done better under the Democats • Whether or not the Democrats’ stock market success has been rewarded at the polls Presidents and Stock Market Returns The table below shows that since 1900, even though Republicans have held the White House for a longer period of time, stock markets have performed better under the Democrats both in terms of higher return and lower volatility. Looking at annual and monthly returns over previous month and the same month a year earlier, stock markets have outperformed under a Democratic Government by a wide margin. At the same time, monthly and annual standard deviation as a measure of risk, have been lower under the Democrats. This means they have been able to deliver higher returns without taking on greater risk. Why have markets done better under the Democrats? It would be easy to say that stock markets have performed better under the Democrats because they have historically tended to pursue expansionary policies that boost the economy, while the Republicans favour austerity policies. However, that comparison doesn’t tell the entire story. The table below shows the performance of each president since 1900 based on stock market performance relative to risk. Despite the overall difference in performance between parties, individual Republican presidents have done very well, presiding in major bull markets particularly in the 1920’s, 1950’s and 1980s. The top four presidential performers are split evenly between the parties, while the top ten features six Republicans and four Democrats, so stock markets have responded positively to policies from presidents of both parties. The difference in performance seems to be more than just good timing and luck as well. Although the Democrats benefitted from President Obama taking over near the bottom of a recession in 2009, Republican President Reagan did the same in 1982. The secret to the Democrats’ success may be found at the bottom of the table. The three worst performing presidents were all Republicans who presided over one or more major bear markets. Once again, this underperformance can’t be blamed solely on timing and bad luck. The Hoover years came during the Republicans’ third term in office, the 1973-1974 market crash was during Nixon’s second term in office. For the second President Bush, one could state he inherited the 2000-2002 tech bubble crash from the Democrats, but the 2007-2009 housing and stock market crash clearly came under his watch in his second term. Based on this analysis, since the Republicans have clearly been able to capitalise on good times as much as the Democrats, it would seem that the Republicans’ underperformance comes from an inability to cushion the blow during bad times. Some of the damage may have been bad timing but much was also self-inflicted, particularly the Watergate scandal which seems to have made the 1973-74 bear market worse, and the pursuit of austerity policies in the early days of the Depression (clearly echoed in the Greek crisis of the last five years) Has the Democrats’ stock market success been rewarded at the polls? Although several Democratic presidents have delivered very strong stock market performance, this hasn’t created a halo effect for subsequent Democratic candidates. There have been four occasions where a new Democratic candidate ran to replace a living Democratic president, and each time they lost. In contrast, under the same circumstances, Republican candidates won three out of five times and stock market performance didn’t seem to matter. Whether you attribute it to the Fed or government policies, stock markets have had a strong run under President Obama. Heading into the 2016 election, however, historical evidence suggests this may not be enough to propel the Democrats to a third term leaving what could be an exciting race for the White House wide open.

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