Market Brief
November 2012
“The Presidential Election and Equity Returns”
Introduction
The Party of the President affects equity returns
Contrary to popular belief, the outcome of the
presidential election does not have all that great of an
impact on the markets as the televised talking heads
and political pundits may have you believe. However,
there may be some truth to beliefs about a pattern to
equity returns based on the year of the presidential
term. Nonetheless, investors do pay attention to
relationships, invented or real, between elections and
market returns.
To us, the popular sentiment is that stock market
returns are better when a Republican has the
presidency and worse when the Democrats are in
control. The old stereotype is that Republicans are the
party of the wealthy, who presumably own more
stocks, therefore Republicans ought to advance policy
that benefits the stock market. Democrats, the old
adages say, are the party of average Americans, and
their policies are believed to be pro-labor and create an
unfavorable environment for stocks.
Though by no means a complete statistical analysis of
the subject, we thought it would be insightful to review
the history of markets and presidential terms. A point
of clarity before we begin – MB Financial Bank does
not endorse any political candidate, and this
publication is intended to be objective and informative
only, rather than an attempt to persuade any electoral
outcome.
Our review of equity returns dispels this common
notion. In our view, perception of equity returns by
the average American is better represented by changes
in the index value, rather total return. Below is a
chart of the S&P500 index value, shaded red for
Republican presidents and blue for Democrats. Our
analysis looks at the average annual rate of change of
S&P 500 and Party of the President
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the S&P500 for each presidential term. These are
then separated to find the average annualized rate of
change for each political party.
As shown in the chart, for the 30 years of Democratic
presidents, equities had price appreciation of 9.27%,
while the 36 years of Republican presidents had
average annual appreciation of only 4.07%. Also note
how much more volatile Republican returns were
17.92% compared to the Democrats 12.82%. For
perspective, the average price appreciation during this
period was 8.06% with a standard deviation of 16.68%.
While hardly a formal statistical test, presenting the
data in this way, shows that the commonly held
associations are simply not true.
The year of the Presidential term affects equity returns
There is another commonly held belief about the
presidents and stock market returns, and it looks to be
more accurate than the political affiliation of the
president. This theory argues that any newly elected
November 2012
president wants to “get the recession out of the way
early.” The thinking is that with a recession in years
one or two of the term, a president stands a better
chance to be reelected since in years 3 and 4 the
economy ought to be on the upswing, and the stock
market rallying to reflect the bounce off the bottom.
Let’s look at the data.
Term Year
1st
Annualized S&P
Current
500 Appreciation Presidency
S&P 500
Appreciation
4.80%
2009
23.45%
2nd
1.84%
2010
12.78%
3rd
17.25%
2011
0.00%
4th
10.18%
YTD 2012
12.33%
Based on the data above, the first half of any
presidential term fares much worse than the second
half, and the third year is the best. Perhaps this belief
is correct. If indeed it were correct, the returns for the
current administration ought to follow a similar
pattern, in fact they are nearly opposite.
Conclusion and Recommendations
What to make of all this? Democratic presidencies have had higher price appreciation. But, it is hard to tell if the
returns of a democratic presidency are significantly different than the S&P500 based on this analysis alone. There
may be some validity to the ordinal returns, irrespective of party affiliation.
We think these relationships are merely associations, not causation, and not a reason for short-term strategy. To
us, there is much more going on, especially when you consider the impact of globalization. Our efforts to prove
these relationships with statistics are incomplete, but ongoing.
We continue to believe in the power of establishing asset allocation targets and ranges, and then periodically
reweighting these back to strategic levels as beneficial for long-term investment success. Focusing on higher
quality stocks, mutual funds with good management and higher coupon bonds further creates opportunity for our
clients to achieve investment success.
On Tuesday night, we recommend turning off the election coverage and picking up a good book. There are more
important things for the markets than who sits in the White House.
Spencer L. Klein, CFA
Senior Portfolio Manager
[email protected]
Investment
Philosophy
MB’s investment philosophy focuses on providing a high-quality investment experience. Using disciplined, fundamentals-based thinking, we
build customized dynamic portfolios to help individuals and institutions meet their goals.
MB Financial Bank Asset Management & Trust 847.653.2149
Disclaimer: Unless otherwise noted, all chart data is derived from Bloomberg.
Disclaimer: Although this information has been obtained from sources which we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This report is
for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security by MB Financial Bank, N.A. Past performance is no
guarantee of future results. Stated stock performance may not be representative of actual client returns due to transaction costs and the timing of trades. Unless otherwise specified, all data
is as of market close, October 31, 2012.
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