Mostly useless

Next Tuesday is super Tuesday, the day when a large number of states hold their primaries for the US Presidential elections. Not that it matters this year since everything is set for a rematch between Trump and Biden (at least at the time of writing). But when the primaries are pretty much a done deal, reporters will try to find something else to write about. And that means that someone will once again write about who is better for the economy and the stock market, a Republican or a Democrat.

The reason why these articles are so tempting is because (i) they reduce the stock market to something that is essentially driven by the man in the White House and (ii) against conventional wisdom, every analysis shows that Democrats are better for the economy and the stock market than Republicans.

I have previously written about the average economic performance during Republican and Democratic presidencies on another blog, but I want to update the results for the stock market and amend it with a new study by Yosef Bonaparte.

First, using the S&P 500, here is a chart of the average stock market return (total return including dividends) under every President since the end of World War II. As you can see it is a pretty mixed picture with Democratic Presidents slightly winning out over Republicans, mostly because of the miserable stock market performance under Nixon and George W. Bush.

Average stock market return under US Presidents

Source: Liberum, Bloomberg

But these two Presidents suffered from bad external shocks. Nixon was President when the OPEC oil shock hit in October 1973 and George W. Bush was still in office during much of the Global Financial Crisis of 2008. Was it their fault that OPEC hiked oil prices or banks collapsed? Depending on your political leaning your answer may differ.

But Yosef Bonaparte from the University of Colorado tried to estimate what the true impact of a President on the stock market was excluding external macro shocks. To do that, he corrected the stock market performance for key drivers that are not under a President’s control. Most importantly, this includes starting valuations of stock markets and the change in short-term interest rates which is controlled independently by the Fed.

Adding other factors like credit spreads on corporate bonds and the shape of the yield curve as a leading indicator for an economy going into recession, he calculates the ‘ability’ of the President as the stock market return not explained by these fundamental factors. And let’s not get into the question whether the ‘ability’ of a President should be measured by the stock market performance…

In any case, below are the results. On average, US Presidents reduced stock market returns. Yet, the uncertainty around the average estimate is very high and thus, one should only accept a President as good or bad for the stock market if his impact was more than one standard deviation above or below it.

Stock market impact of US Presidents

Source: Bonaparte (2024)

If we use these thresholds then Jimmy Carter was a ‘good’ President because given the miserable economy and the high volatility in the stock market he faced, the return was substantially better than can be explained by chance.

Meanwhile, Reagan, the President most revered by US equity investors turns out to be a rather ‘bad’ President because given the low starting valuation of stock markets at the beginning of his Presidency and the successful fight against inflation led by Paul Volcker at the Fed, stock market returns under his Presidency should have been some 60% higher than they really were.

And the rest of the lot? They are mostly useless when it comes to driving stock market returns.

Which is truly the one and only thing anyone should keep in mind about the impact of Presidents on stock markets: There is none. Horse race exercises like the one I did here are useless. You are simply trying to find a pattern in a random set of data. Don’t think for a moment that Presidents, Prime Ministers, or other government leaders have any meaningful impact on the performance of stock markets. They simply don’t. Not in the US, not in the UK, not anywhere…

…except for Prime Minister Liz Truss. She really screwed the UK over with her mini-budget.

The Truss mini budget required central bank intervention to stabilise markets

Source: Liberum, Bloomberg