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 a president from another party?
I wish things were that simple.
The answer to this question often varies depending on who you ask, and most answers come with various qualifications, such as “well, this president continued the policies of the previous president,” or “the president’s term was affected by exogenous shocks,” or “does the president’s party control Congress?” or “are we measuring from Election Day or Inauguration Day?”
Here’s my answer: History shows that the political leanings of the U.S. president may not matter as much to stock market performance as you think.
Take a look at this simple chart from Keith Lerner of Truist, which shows the trajectory of the S&P 500 since 1948, with time periods color-coded according to the presidential party: There are no obvious patterns that stand out, other than long periods of the market trending upwards.
“Under both political parties, markets have presented opportunities and risks,” Lerner wrote in a July 2 note. “While elections matter, it is important not to view them in isolation. Business cycles matter, as do valuations, geopolitics, monetary policy and other factors.”
In fact, who controls the White House is just one of many variables that investors must consider when putting their money to work in the stock market.
If you’d like more details on how stocks performed under each presidential administration, Ryan Detrick of the Carson Group has the lowdown.
“What matters more is not who is in the White House but how the economy, profits, inflation and Fed policy work together,” Detrick wrote.
If you want to know, you’ll find that, historically, presidents of one party have had better returns than presidents of the other party. As Schwab’s Liz Ann Sonders and Kevin Gordon put it, “If you covered the modern era of the S&P 500 and invested only when a Republican was in the White House, an initial investment of $10,000 in 1961 would have grown to more than $102,000 by 2023. Meanwhile, if you invested only when a Democrat was in the White House, that same initial investment of $10,000 would have grown to more than $500,000.”
US President Joe Biden and former US President and Republican presidential candidate Donald Trump participate in the first presidential debate for the 2024 election at CNN Studios in Atlanta, Georgia, June 27, 2024. (Photo by Andrew Caballero Reynolds/AFP) (Andrew Caballero Reynolds via Getty Images)
So is this a move to only put money into the market if the president is a Democrat? For investors looking to build wealth over time, the answer is actually no.
“That same $10,000 initially invested in 1961 would have grown to more than $5.1 million simply by continuing to invest, regardless of party in power,” Saunders and Gordon wrote.
The story continues
As the saying goes, being in the market for a long time is more important than timing the market.
The Big Picture
You don’t have to go back very far in history to find a president you didn’t or wouldn’t have voted for, and the stock market probably did pretty well during his term.
To be clear, who the US president is does, of course, matter: it has a direct impact on sentiment, can have short-term and long-term societal consequences, and can even affect the potential for economic growth.
But from a long-term investor’s perspective, the person who sits in the Oval Office likely has little impact on the existing forces that move markets.
Personally, I think one of the reasons is that everyone wants to make things better, regardless of real or perceived challenges. We all want a better life for ourselves and our loved ones. Often this includes ownership of goods and access to services. Consumers and businesses are always looking for more and better, which inspires entrepreneurs and innovators to endlessly develop and deliver better goods and services.
Successful businesses grow in size as their revenues grow – some even become large enough to be listed on the stock market. In the process, living standards rise, economies grow, and revenues increase – which in turn drive up stock prices.
Where we differ is over how to pursue this pursuit, and how to balance it with other needs and desires. And these differences lead us to vote differently.
Depending on who becomes president, one group will feel more challenged than the other, and certainly some businesses and industries may fare better than others.
But regardless of who’s in the White House, it seems like everyone is going to continue this pursuit of wanting to make things better. What drives the economy forward and drives the markets up is what we all have in common.
At the end of the day, life seems to go on.
At least, history suggests so.
Consider macro cross currents
Last week there were several notable data points and macroeconomic trends to consider.
Shopping remains stable near record levels; retail sales fell slightly in June to $704.3 billion.
Major categories including online, building supplies, health and personal care, furniture, clothing and electronics grew. Gas stations led the decline with a 3.0% decrease. Auto and parts sales fell 2.0%.
The figures were further evidence that the economy has gone from very good to fairly good.
Card spending data is mixed. According to JPMorgan, “As of July 8, 2024, Chase consumer card spending data (unadjusted) was up 0.3% compared to the same date a year ago. Based on Chase consumer card data through July 8, 2024, the U.S. Census July Retail Sales Administered Index is estimated to be up 0.15% month-over-month.”
From Bank of America: “According to BAC aggregated credit and debit card data, total card spending per household for the week ending July 13 was down 1.6% year-over-year. Retail spending excluding autos per household for the week ending July 13 was -3.0% year-over-year. The declines compared to last week are likely due, at least in part, to the impacts of Hurricane Beryl.”
Rising unemployment claims. Initial claims for unemployment insurance jumped to 243,000 in the week ending July 13 from 223,000 the previous week. While the recent figure is above the September 2022 low of 187,000, it remains at levels historically associated with economic growth.
Industrial activity increased. Industrial production activity increased 0.6% in June from the previous month. Manufacturing output increased 0.4%.
Homebuilder sentiment is down. NAHB’s Carl Harris said: “While buyers appear to be waiting for interest rates to fall, homebuilders’ six-month sales expectations are rising and inflation data is showing signs of easing, suggesting homebuilders are expecting mortgage rates to gradually decline later this year.”
New home construction is on the rise. According to the Census Bureau, housing starts rose 3.0% in June to an annualized rate of 1.35 million. Building permits rose 3.4% to an annualized rate of 1.45 million.
Mortgage rates are falling. The average rate on a 30-year fixed-rate mortgage fell to 6.77% from 6.89% the previous week, according to Freddie Mac. Freddie Mac said: “Mortgage rates are trending in the right direction and the economy remains resilient, two positive signs for the housing market. However, homebuyers have not yet responded to lower interest rates, and demand for purchase applications remains about 5% lower than in the spring, when rates were roughly the same. This is not unusual. Falling interest rates can also weaken demand, and this apparent discrepancy results from buyers wanting to ensure that interest rates do not fall further before making a purchase decision.”
There are 146 million homes in the U.S., of which 86 million are owner-occupied and 39% are mortgage-free. Most of those with mortgages have fixed-rate mortgages, and the majority of those were fixed before interest rates spiked from rock-bottom in 2021. That means most homeowners aren’t particularly sensitive to fluctuations in home prices or mortgage rates.
Gas prices are rising. From AAA: “The national average price for a gallon of gasoline fell 4 cents since last week to $3.50, likely as demand for gasoline is dire and summer heat keeps people driving less.”
Offices remain relatively empty. According to Kastle Systems, “The weekly average peak last Wednesday remained unchanged at 56% occupancy. Friday was the average lowest day, at 15.1% compared to 33.5% the previous week. The drop after the July 5th holiday is in line with previous years. Houston’s average lowest day on Monday was an unusual 4.7% occupancy, less than half that of other cities. This was likely due to extreme weather and power outages caused by Hurricane Beryl.”
This is something the pros are worried about: According to Bank of America’s May Global Fund Manager Survey, fund managers identify “geopolitical conflict” as the “biggest tail risk.”
The truth is, we’re always worrying about something, that’s the nature of investing.
Near-term GDP growth forecasts remain positive, with the Atlanta Fed’s GDPNow model predicting real GDP growth will rise 2.7% in the second quarter.
Putting it all together
Evidence continues to suggest that a bullish “Goldilocks” soft landing scenario is underway, in which inflation falls to manageable levels without the economy falling into recession.
This comes as the Fed continues to maintain very strict monetary policy as part of its ongoing efforts to tame inflation. It is true that the Fed is taking a less hawkish stance in 2023 and 2024 than in 2022, and most economists agree that the final rate hike of the cycle has already occurred, but inflation still has to cool off for a while before the central bank feels comfortable with price stability.
Therefore, we should expect central banks to continue to tighten monetary policy, which means we should be prepared for a prolonged period of relatively tough financial conditions (higher interest rates, tighter lending standards, lower equity valuations, etc.) All of this means that monetary policy will remain unfavorable to markets for the time being, and there will be a relatively high risk of the economy slipping into recession.
At the same time, we know that stocks are a discount mechanism, meaning that they will likely bottom out before the Fed signals a significant dovish shift in monetary policy.
And while recession risks are rising, we should also remember that consumers are in very good financial shape: those who are unemployed are finding jobs and those with jobs are getting raises.
Similarly, corporate financial positions are strong, as many companies have locked in debt at low interest rates in recent years. Despite the looming threat of rising debt-servicing costs, high profit margins give companies some room to absorb rising costs.
At present, the downturn is unlikely to turn into an economic catastrophe, given that consumers and businesses remain in very strong financial positions.
And long-term investors should always remember that recessions and bear markets are inevitable when entering the stock market with the goal of generating long-term income. While the market has had a volatile year recently, the long-term outlook for stocks remains bright.
A version of this post first appeared on TKer.co
