A version of this post first appeared on TKer.co
Is a U.S. president from one political party better for the stock market than one from another party?
If only things were that simple.
The answer to this question often varies depending on whom you ask. And most answers will come with all sorts of caveats including: “Well, this president inherited the policies of the last president” or “That president’s term was affected by an exogenous shock” or “Does the president’s party control Congress?” or “Are we measuring from Election Day or Inauguration Day?” and so on.
Here’s my answer: History suggests that a U.S. president’s political slant may not be as important for stock market performance as you might assume.
Consider this simple chart from Truist’s Keith Lerner. It’s the trajectory of the S&P 500 since 1948 with periods shaded depending on the President’s political party. There aren’t any obvious patterns that jump out — except for the fact that the market spends a lot of time trending higher.
“Markets have presented opportunities and risks under both political parties,” Lerner wrote in a July 2 note. “Elections matter, but it’s important not to look at them in isolation. The business cycle matters, as do valuations, geopolitics, monetary policy, and other factors.”
Indeed, the person who occupies the White House is just one of many variables investors should consider when putting money to work in the stock market.
In case you’re looking for a more granular look at what stocks did under each President, Carson Group’s Ryan Detrick has you covered.
“What matters more is how the economy, profits, inflation, and Fed policy all line up, not who is in the White House,” Detrick wrote.
If you must know, you will find that historically presidents from one party have been associated with better returns than those from another. Here’s Schwab’s Liz Ann Sonders and Kevin Gordon: “Covering the modern period for the S&P 500, investing only when a Republican was in the White House, a $10K initial investment in 1961 would have grown to more than $102K by 2023. On the other hand, the same $10K initial investment would have grown to more than $500K, investing only when a Democrat was in the White House.”
So is the move to only have money in the market when the president is a Democrat? For investors looking to build wealth over time, the answer is actually no.
“The same $10K initially invested in 1961 would have grown to more than $5.1M by just staying invested, without regard for the political party in power,” Sonders and Gordon wrote.
As they say, time in the market beats timing the market.
The big picture
You don’t have to look very far back in history to see a president you didn’t vote for or wouldn’t have voted for. And odds are, the stock market performed pretty well during his term.
To be clear, of course it matters who is president of the United States: It has an immediate impact on sentiment, could have short-term and long-term social implications, and may even move the needle on the potential for economic growth.
But from a long-term investor’s perspective¹, the person who occupies the Oval Office has an arguably marginal impact on the already existing forces driving the markets.
I personally think part of why that’s the case is that everyone wants things to be better regardless of real or perceived challenges. We all want better lives for ourselves and those we love. More often than not, this involves owning goods and accessing services. Consumers and businesses constantly demand more and better things, which incentivizes entrepreneurs and innovators to endlessly develop and deliver better goods and services.
The winners in business get bigger as their revenue grows. Some get big enough to be listed in the stock market. In this process, living standards improve, the economy grows, and earnings grow. Furthermore, earnings drive stock prices.
Where the populace disagrees is how we go about this pursuit, and how we balance it against our other needs and wants. And in turn, these disagreements have us voting in different directions.
Depending on who becomes president, one group will feel more challenged than the other. And yes, some companies and industries may do better than others.
But regardless of who ends up in the White House, it seems that everyone will continue this pursuit of wanting things to be better. It’s what we all have in common that moves the economy forward and drives markets higher.
At the end of the day, life seems to go on.
At least that’s what history suggests.
Reviewing the macro crosscurrents
There were a few notable data points and macroeconomic developments from last week to consider:
Shopping stabilizes near record levels. Retail sales inched lower in June to $704.3 billion.
Key categories including online, building materials, health and personal care, furniture, clothes, and electronics grew. Gas stations led weakness, falling 3.0%. Motor vehicle and parts sales declined by 2.0%.
The print was more evidence that the economy has gone from very hot to pretty good.
Card spending data is mixed. From JPMorgan: “As of 08 Jul 2024, our Chase Consumer Card spending data (unadjusted) was 0.3% above the same day last year. Based on the Chase Consumer Card data through 08 Jul 2024, our estimate of the U.S. Census July control measure of retail sales m/m is 0.15%.”
From Bank of America: “Total card spending per HH was down 1.6% y/y in the week ending Jul 13, according to BAC aggregated credit & debit card data. Retail ex auto spending per HH came in at -3.0% y/y in the week ending Jul 13. The drop compared to last week was likely at least partly due to the impact of Hurricane Beryl.”
Unemployment claims rise. Initial claims for unemployment benefits jumped to 243,000 during the week ending July 13, up from 223,000 the week prior. And while recent prints remains above the September 2022 low of 187,000, they continue to trend at levels historically associated with economic growth.
Industrial activity rises. Industrial production activity in June increased 0.6% from the prior month. Manufacturing output rose 0.4%.
Homebuilder sentiment falls. From the NAHB’s Carl Harris: “While buyers appear to be waiting for lower interest rates, the six-month sales expectation for builders moved higher, indicating that builders expect mortgage rates to edge lower later this year as inflation data are showing signs of easing.”
New home construction rises. Housing starts rose 3.0% in June to an annualized rate of 1.35 million units, according to the Census Bureau. Building permits grew 3.4% to an annualized rate of 1.45 million units.
Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.77% from 6.89% the week prior. From Freddie Mac: “Mortgage rates are headed in the right direction and the economy remains resilient, two positive incremental signs for the housing market. However, homebuyers have yet to respond to lower rates, as purchase application demand is still roughly 5 percent below Spring, when rates were approximately the same. This is not uncommon: sometimes as rates decline, demand weakens, and the apparent paradox is driven by buyers making sure rates don’t decline further before they decide to purchase.”
There are 146 million housing units in the U.S., of which 86 million are owner-occupied and 39% of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
Gas prices tick up. From AAA: “The national average for a gallon of gas fell four cents to $3.50 since last week. The likely cause is the terrible demand number for gasoline, as folks may be curtailing driving amid sizzling summer temperatures.”
Offices are still relatively empty. From Kastle Systems: “The weekly average peak remained unchanged at 56% occupancy, this past week on Wednesday. Friday — the average low day — only reached 15.1%, compared to 33.5% the previous week. The July 5th post-holiday dip follows a similar trend as in previous years. Houston experienced an unusually low average low day on Monday at just 4.7% occupancy — less than half that of any other city. This was likely due to extreme weather and blackouts from Hurricane Beryl.”
This is the stuff pros are worried about. According to BofA’s May Global Fund Manager Survey, fund managers identified “geopolitical conflict” as the “biggest tail risk.”
The truth is we’re always worried about something. That’s just the nature of investing.
Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.7% rate in Q2.
Putting it all together
We continue to get evidence that we are experiencing a bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.
This comes as the Federal Reserve continues to employ very tight monetary policy in its ongoing effort to get inflation under control. While it’s true that the Fed has taken a less hawkish tone in 2023 and 2024 than in 2022, and that most economists agree that the final interest rate hike of the cycle has either already happened, inflation still has to stay cool for a little while before the central bank is comfortable with price stability.
So we should expect the central bank to keep monetary policy tight, which means we should be prepared for relatively tight financial conditions (e.g., higher interest rates, tighter lending standards, and lower stock valuations) to linger. All this means monetary policy will be unfriendly to markets for the time being, and the risk the economy slips into a recession will be relatively elevated.
At the same time, we also know that stocks are discounting mechanisms — meaning that prices will have bottomed before the Fed signals a major dovish turn in monetary policy.
Also, it’s important to remember that while recession risks may be elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs, and those with jobs are getting raises.
Similarly, business finances are healthy as many corporations locked in low interest rates on their debt in recent years. Even as the threat of higher debt servicing costs looms, elevated profit margins give corporations room to absorb higher costs.
At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have recently had some bumpy years, the long-run outlook for stocks remains positive.
