Democratic vs. Republican: Which is better for the stock market?

Courtesy of CNN

Written by Robby Sain

It is safe to say that COVID-19 brought with it alterations, particularly in the financial sector, that not many foresaw. In terms of the stock market, we witnessed historic drops day after day, each topping the preceding fall. The DJIA, for instance, crashed 2,013.76 points March 9th, 2020, followed by a 2,352.60- and 2,997.10-point decline on March 12th and 16th, respectively. Despite this, the DJIA – as well as related indexes – has experienced v-shaped recovery, rebounding to levels reminiscent of pre-COVID statuses. As the results of the election are debated, uncertainties regarding the potential market effects of the future president’s political party have precipitated; Trump himself alluded to analyst claims, saying that if Biden, a Democrat, is elected, “the stock market will crash.” 

In terms of this Trump vs Biden (and thus, the broader Republican vs Democrat) debate, many automatically assume that the Republican president would serve more favorably for the market. This is due to the Republican sentiment of reducing both government spending and corporate taxes, the latter of which, could increase business profits (and ultimately, share price). Historically, however, the stock market has shown a greater overall return under Democratic presidencies, as opposed to Republican ones. According to Liberum, a UK Investment Bank, data from 1947 to 2020 revealed a 10.8% S&P return under a Democratic president, compared to a 5.6% return under a Republican president. On the surface, this seems to show that Democratic presidents serve better for the stock market; in this interpretation, Biden would expectedly be more ideal for investors. 

However, it is important to note the confounding variables that prevent such a deduction from being true. That is, Republican presidents dealt with severe financial crises (e.g. 2008, 2020) that skew the data in favor of the opposing party. This is not to say Republican presidents cause such crises but rather, the onset of external detriments to the market simply arose during Republican presidencies. For instance, the aforementioned market crash in March of 2020 was induced by nation-wide restrictions in response to a pandemic, an unforeseen circumstance no Democratic president in Liberum’s study dealt with. An additional confounder is the political party in Congress. According to CFRA Research, a financial institution in NYC, a divided government produces historically different returns relative to government trifectas – a situation where one political party controls both the legislative and executive branch. In the past, when a Democratic president had a government trifecta, the market rose on average 9.8% – With a Republican Congress and a Split Congress, it rose 13% and 13.6%, respectively. On the other hand, a Republican president with a government trifecta saw average market gains of 12.9%; with a Democratic Congress and a Split Congress, the market merely rose 4.9% and 5.2%, respectively. This latter research by CFRA shows that  it is not solely the president’s own political party that affects market return rates. Rather, the division of government – as well as the aforementioned external adversities – have a premier influence. As of right now, Joe Biden is the President Elect for the United States, and Democrats have assumed a majority in the House. Provided Republicans maintain control in the Senate, history shows we could be looking at the ideal scenario for investors, contrary to President Trump’s claims.

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