An important question to consider: Should investors be rooting for one side or the other? Republicans are usually seen as more “business-friendly” than Democrats, but has that translated to stock market outperformance?
Contrary to conventional wisdom, stocks have historically done better under Democratic presidents than Republicans. Starting with Eisenhower in 1953, we estimate the S&P 500 has delivered a 14.1% annualized total return when a Democrat was in the Oval Office, compared to 8.9% under Republicans. Overall, large-cap U.S. stocks returned 11.2% per year—enough to turn $1 into almost $2,000!
Presidents are not all-powerful. They can’t snap their fingers and make GDP go up, nor inflation go down. The United States has rule of law, separation of powers, and due process. It’s not easy to translate words into action, and there’s a big difference between talking points on the campaign trail and passing legislation.
When thinking about historical returns, consider all the other things that were happening in the world: Federal Reserve interest rate policy, financial crises, wars & other geopolitical events, bubbles, inflation, etc. The President doesn’t necessarily have control over any of these things.
For example, the S&P 500 returned 17.5% per year during the two terms of Democrat Bill Clinton, who benefited from the inflating of the dot-com bubble. Then Republican George W. Bush (-3.8% annual return) was elected just in time for the popping of the dot-com bubble and the 9/11 terrorist attacks. Bush finished his second term near the trough of the Global Financial Crisis. Democrat Barack Obama (+16.2% annual return) benefited from the post-crisis recovery in stock valuations and a long stretch of zero interest rates. Stocks did well under Republicans Ronald Reagan (+15.1%/year), George H.W. Bush (+14.7%/year), and Donald Trump (+15.9%/year), but struggled during the Nixon/Ford administrations (+3.9%/year) because of the OPEC oil embargo, Watergate scandal, and high inflation.
Our conclusion is simple: Vote with your conscience, but try to avoid letting your political views influence your portfolio. There are 1,000 different factors that determine the short-term direction of the stock market, and the president is only 1 of the 1,000. As always, diversification is key, helping to protect against any risks that arise from shifting political dynamics in the future.
Diversification Is Key
Diversification can help protect your portfolio in today’s shifting political landscape. Start by getting a 2nd opinion from an experienced financial advisor.
