Which party is really better for the stock market? It depends

Published Thu, Oct 1 20201:41 PM EDT

Everyone knows that Republicans are better for the stock market, right? Actually, that's not true. So it must be Democrats. But wait. That's not so accurate, either. In reality, evaluating which party plays more into the hands of investors requires some nuance and a clear analysis of what the secret sauce is that makes Wall Street's motor run. The partisan question comes into view every four years or so as the nation makes its way to the polls to decide who is going to occupy the Oval Office. President Donald Trump has overseen a solid market performance, but his opponent, Democrat Joe Biden , has said that the rise has come amid a backdrop in which economic gains have flowed mostly to the rich . Conventional Wall Street wisdom is that putting a pro-business Republican in charge would seem to be better for the stock market. Time has shown, though, that the S & P 500, at least, has fared better when Democrats own the presidency. But that doesn't tell the whole story. "The stock market has done well historically under Democrats. Now Republicans will say, 'Sure it does, because we got things ready for it. We fixed the economy," said Quincy Krosby, chief market strategist at Prudential Financial. "But the fact is, there's always something to invest in." Looking at which party is in charge of Congress and the national purse strings and can do more to impact spending, tax breaks and all the other intricacies of fiscal policy than any president, provides a better view of how the market performs in the various political climates. In raw terms, Democratic control of the White House has seen an average 11.1% gain since World War II, compared to just a 6.9% rise under Republicans, according to data compiled by Sam Stovall, chief investment strategist at CFRA. However, when Republicans hold the House, where all spending bills originate, the market has been up an average of 10.5%, compared to 7.9% under Democrat control. Viewing the situation even more broadly, the best combination for average returns has been a Democratic president with a split Congress, followed closely by a Democrat president with a Republican Congress and then by complete GOP control. Looking for a trend? Good luck with that. "Here's a perfect example of using data to prove whatever story you want," Stovall said in an interview. "We can try to make patterns out of it, especially when it comes to sectors, but let's just say it's the luck of the draw." A look at some recent history helps underscore how difficult it is to use party analysis to judge stock market performance. Republican George W. Bush's presidency saw poor returns, as his two terms in office were bookended by the dotcom bubble bursting, a remnant from Democrat Bill Clinton's years, and the financial crisis. Republicans controlled Congress through most of Bush's years. He was followed by Democrat Barack Obama, who took office near the end of the financial crisis and accompanying Great Recession and benefited greatly from unprecedented levels of monetary and fiscal stimulus. S & P 500 returns during the Obama years totaled 166%, amid record levels of public debt, historically low interest rates and nearly $4 trillion in monetary stimulus from the Federal Reserve. The Senate and House were split during most of Obama's time in office. Since the financial crisis, the Fed has taken on a more active role in the economy , with its quantitative easing bond-buying programs correlating strongly with stock market returns. Obama had a very loose Fed, while Trump, at least prior to the coronavirus pandemic, had a Fed that was gradually tightening policy. "Mostly what affects the market is the role of the Federal Reserve. That's invariably what has the market shifting from bullish to bearish," Krosby said. From a political perspective, the best indicator may be simply the chances of re-election depending on market performance: Stovall found that when the market is up from July 31-Oct. 31, the chances for re-election have been 82%, while when the opposite is the case, the chances for replacement are 88%. August was a good month for stocks in 2020, but September was not. That means October's performance could tell the tale.

U.S. President Donald Trump and Democratic presidential nominee Joe Biden speaking during the first 2020 presidential campaign debate.

Brian Snyder | Reuters

Everyone knows that Republicans are better for the stock market, right?

Actually, that's not true. So it must be Democrats.

But wait. That's not so accurate, either.

In reality, evaluating which party plays more into the hands of investors requires some nuance and a clear analysis of what the secret sauce is that makes Wall Street's motor run.

The partisan question comes into view every four years or so as the nation makes its way to the polls to decide who is going to occupy the Oval Office. President Donald Trump has overseen a solid market performance, but his opponent, Democrat Joe Biden, has said that the rise has come amid a backdrop in which economic gains have flowed mostly to the rich.

Conventional Wall Street wisdom is that putting a pro-business Republican in charge would seem to be better for the stock market. Time has shown, though, that the S&P 500, at least, has fared better when Democrats own the presidency.

But that doesn't tell the whole story.

"The stock market has done well historically under Democrats. Now Republicans will say, 'Sure it does, because we got things ready for it. We fixed the economy," said Quincy Krosby, chief market strategist at Prudential Financial. "But the fact is, there's always something to invest in."