Election Bull, Election Bear

Policies Over Parties
November 29, 2018

Election seasons bring with them many things: promises of change, calls for revolution, an unending stream of obnoxious television ads, and a great gnashing of teeth in the investment community. Without fail, advisors hear from all their clients “I am afraid of [insert Democrat or Republican candidate]. They will cause a gigantic market collapse and ruin our economy. How can I mitigate risk in light of this potential outcome?”

Opinions about whether Democrats or Republicans are better for markets are about as diverse as the NYSE. But just as in the market, past performance isn’t an indicator of future outcome, and while statistics can be useful in examining relationships and establishing trends, they have notoriously poor predictive power when it comes to elections (just look at 2016). What they do show is that there’s little evidence of a causal relationship between either party being in control and whether stocks perform well.

Even cursory examination of the data shows inconclusive results. The S&P 500 reports annual growth. Going all the way back to 1929, annual growth averaged 5.63% under Republican control of the House, but 7.87% under Democrat. Annual growth averaged 9.84% under a Republican Senate, but only 5.89% under Democrat. The S&P averaged 10.48% under Democrat presidents and only 3.5% under Republican ones. Of course, these averages don’t account for any potential growth premiums associated with parties holding multiple chambers and/or the presidency at once. These too are a mixed bag, with different permutations yielding contradictory results.

Recent robust statistical research by Sean Campbell of the Federal Reserve Board and Canlin Li of the University of California found no statistically significant relationship between the political party of the president and stock market returns. This fact shouldn’t come as any surprise, given that the president or Congress’ political party are but one string in a mass of interwoven threads tugging on the market in many different directions.

Markets, on average, care little about what party is in power. But don’t let this fool you – when it comes to policies, they care a great deal. Our nation’s many “laboratories of democracy” present us the unique opportunity to measure the way different policies affect economic growth. And the evidence tends to show those states adopting lower tax rates, limited government, and less regulation outperform others. A Tax Foundation survey in 2012 found 26 peer-reviewed studies on taxation and economic growth since 1983. Of those, 23 indicated negative relationships between taxes and economic growth. While lower-tax states like North Carolina, Tennessee, Florida, and Georgia enjoy strong economic growth, more and better jobs, and record numbers of people moving in, higher-tax states like California, New York, and Illinois tend to struggle in those areas.

It is a rather refreshing thing to know that our stock market isn’t partisan. History shows us markets encourage cooperation, exchange, and bipartisanship. So rather than worrying which party is going to bankrupt your portfolio, focus on which policies the market shows will produce the best economic outcomes and take that to the polls.