Does the Stock Market Prefer Republican Administrations?
Does the Stock Market Prefer Republican
Administrations?
by James R. Booth &
Lena Chula Booth
There's
an old adage that a Republican in the White House means higher stock market
returns. This adage derives from the generally held view that policies promoted
by Republicans are more favorable to stock markets and capital formation.
The humorist Will Rogers reportedly suggested that, in order to find the
place where the Republican Party was formed, one should find out where the
first business was formed. This has translated into Wall Street folklore
that, since Republicans represented the party favored by business, the stock
market prefers Republicans to Democrats.
The
Economic Letter published by the Federal Reserve Bank of San Francisco
recently examined the evidence related to stock market performance when
Democratic and Republican candidates occupy the White House. Using data
for the period 1871 to 1997, we find that the stock returns are almost identical
under Democratic and Republican administrations. The Democrats have a slight
edge in the pre-World War II period as a result of the effect of the 1929
crash and the subsequent recovery. However, since 1945, the returns have
not been statistically different when Democrats or Republicans occupy the
White House. These findings generally confirm earlier studies for different
time periods and stock market indexes, although recent strong stock market
performance gives Democrats a slight edge (though it is not statistically
significant) in the postwar period.
Previous Research
While
the party in the White House is not always the party in control of the Congress,
the presidential administration is often judged to be more responsible for
the health of the economy than the Congress. Consistent with this view,
studies examining stock market performance under the political parties generally
focus on when each party occupied the presidency. Most studies focus on
the immediate market reaction to the election of the presidential candidates
of each party. For example, Riley and Luksetich (1980) look at the immediate
stock market reaction in the day, week, or month around an election. These
"event" studies covering the period of 1900 to the late 1960s
and early 1970s generally show mild positive reactions to the election of
Republicans relative to Democrats. This performance is confirmed by Siegel
(1994), who finds that during the 1888 through 1992 period, the Dow Jones
Industrial Average (DJIA) fell an average of 0.75 percent on the day following
Democratic victories. For the same period, Republican victories are associated
with rises in the stock market of 0.81 percent on average. Since World War
II, the market has fallen slightly over 1 percent when a Democrat was elected,
and has risen only slightly on Republican victories.
Siegel
(1994) also calculates the returns for the Dow Jones Industrial Index over
the terms of the different presidents. He finds that since 1888, the DJIA
fared better under Democratic administrations in nominal terms, but not
after controlling for inflation. Using data after 1948, Siegel finds that
the market has experienced higher returns under Democratic than under Republican
administrations, even after controlling for inflation. He does not test
whether the results for the two sub-periods were statistically different.
Another look at the evidence
In
this article, we focus on the performance of the market over presidential
terms. We compare the performance of the market during the years of Democratic
versus Republican administrations. Examining return data for the period
1871 through 1997, we cover a sample of nineteen Republican and fourteen
Democratic administrations.
For
the 1926-1997 period, we use annual return data collected from The Stock
Bonds, Bills, and Inflation Yearbook, 1998, by Ibbotson Associates.
To extend the sample back to 1871, we rely on the stock index compiled by
the Cowles Commission presented in Wilson and Jones (1987). Both series
represent a broad index of total stock returns for a portfolio of large
stocks. The index of large stocks is the total return on the S&P 90
for the 1926-1956 period and the S&P 500 composite from 1957-1997. During
the 1871 to 1925 period the Cowles index tracked the largest stocks in the
U.S. market, with the total at 48 in 1870 and growing to 258 in 1925.
In
the two panels of Figure 1, we report the average annual total returns under
each of the presidential administrations during the sample period. The data
cover the last two years of the first Grant administration through the first
year of the second term of the Clinton administration. This means that the
average return for the entire period is not the same as the average of the
mean annual returns for each administration.
From
Figure 1, we can see that the average annual returns for the broad index
of stocks are virtually always positive during both Democratic and Republican
administrations, with the
exception of two Democratic and three Republican administrations. The largest
negative annual returns (-21.2 percent) occurred during the Hoover administration,
which included the 1929 stock market crash. The largest positive returns
occurred during the first Roosevelt administration (+33.5 percent), reflecting
the recovery from the crash of 1929. For the Democratic Party, the second
term of Roosevelt, 1937-1940, had an average annual return of -3.1 percent.
Since 1945, the average annual returns are positive for all presidential
terms, both Democratic and Republican.
In
Figure 2, we include the averages for the periods 1871-1997, 1926-1997,
and 1945-1997. We use this breakdown to provide comparison with earlier
studies and to determine whether the results are sensitive to the impact
of the Great Depression and whether the results are different for the 1945
to 1997 sub-period.
Positive average
annual returns exist for both parties over each of the sub-periods. For
the period 1971-1997, the average annual returns for Republican and Democratic
administrations were 10.5 and 11.7 percent, respectively. During the 1926
to 1997 sub-period, the return was 10.7 percent for Republican administrations
and 15.1 for Democratic administrations. The returns for both periods give
a slight edge to Democratic administrations, though the returns are similar.
Statistical tests indicate that the returns are not significantly different.
The
data for the period after 1945 provide stronger evidence that the returns
are on average the same under the administration of both parties. For Republicans,
the average annual return is 13.1 percent and for Democratic administrations
it is 15.3 percent. The strong recent performance of the market gives an
edge to Democrats. However, because of the high degree of variations in
returns and the small number of presidential terms, statistical tests fail
to conclude that the mean returns are different. Overall, these findings
suggest that stock returns are similar for the Democratic and Republican
administrations, especially since World War II.
Our
findings are similar to those reported by Siegel (1994) for the DJIA. He
finds that average returns between 1948 and 1992 were 13.4 percent under
Democrats and 11.4 percent under Republicans. Though no statistical tests
for differences in mean returns are presented, he concludes that the market
has fared better under Democrats than under Republicans in both real and
nominal returns.
Our
statistical tests of returns on a broader index indicate that the returns
are not statistically different under Republicans or Democrats. To the extent
that our estimates differ from Siegel's, it is probably due to the difference
in the years covered by the samples (we use 1945-1997, while Siegel uses
1948-1992) or to the fact that we use the S&P 500, a broader index than
the DJIA which Siegel uses.
Conclusion
Over
the years, stock analysts have suggested that the market prefers Republicans
in the White House. This apparently arises from the view that Republican
administrations are more favorable toward business than Democratic administrations.
Most studies attempting to document this have focused on the stock returns
around elections, and find weak evidence for this in the behavior of the
stock market. In this study, we examine the returns on the market over the
Democratic and Republican terms in office from 1971 to 1997. We find, contrary
to earlier belief, that there is no support for returns being different
under one political party versus the other. The old adage that the market
prefers Republicans is not evidenced. On the contrary, the evidence indicates
lightly, but not statistically significant, higher returns during Democratic
administrations.
Editor's
Note: Written for the Federal Reserve Bank
of San Francisco Economic Letter by James R. Booth, Arizona State University
and Visiting Scholar, FRBSF and Lena Chula Booth, Thunderbird, American
Graduate Scool of International Management. Reprinted with permission from
the Federal Reserve Bank of San Francisco Economic Letter (Number 98-19,
June 19, 1998). The opinions expressed in this article do not necessarily
reflect the views of the management of the Federal Reserve Bank of San Francisco,
or of the Board of Governors of the Federal Reserve System.
|| TABLE OF CONTENTS || Bull & Bear Newsletter Digest || Bull &
Bear Reporter Featured Companies || Monetary Digest |
| The Bull & Bear Financial Report Copyright 1999 | All Rights Reserved Reproduction in whole or part is strictly prohibited without prior written permision NOTE: The Bull & Bear Financial Report does not itself endorse or guarantee the accuracy or reliability of information, statements or opinionsexpressed by any individuals or organizations posted on this site PLEASE READ DISCLAIMER |
Web Site Designed & Maintained by Estrada Design & Communications in association with THE BULL & BEAR INTERNET DIVISION |