Conventional wisdom says that those liberal Dems are generally bad for the economy and the stock market because of their big government tendencies, while fiscally conservative Republicans are good. This widely accepted belief is actually fake news if you look at data going back to the end of World War II.
“Stock markets do perform better under Democrats than under Republicans. That’s a well-known fact, but it does not imply cause and effect,” says Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. From 1952 through June 2020, annualized real stock market returns under Democrats have been 10.6% compared with 4.8% for Republicans.
With the 2020 election less than four months away, some investors are fretting about the pros and cons of a Trump vs. Biden presidency. A Democratic sweep would almost certainly mean a rollback of Trump’s massive corporate tax cut (a negative for stocks), but additional economic stimulus (which the market apparently loves despite deficit implications) and stability on the China trade front would be a big positive.
According to Siegel, author of the 1994 investment classic Stocks For The Long Run, Wall Street’s obsession with politics is mostly misplaced: “Bull markets and bear markets come and go, and it’s more to do with business cycles than presidents.” In some ways the current environment has characteristics of the existential threat faced by George W. Bush post-2001 (replace terrorism with pandemic), the civil unrest that plagued the Johnson and Nixon administrations and Ronald Reagan’s trade war with Japan in the 1980s.
In an effort to more closely examine the relationship between the actions of a president and the direction of stocks, Forbes has analyzed their stock market performances, including dividends, dating back to Harry Truman. Using data from the National Bureau of Economic Research (NBER), we’ve also noted for each president the number of expansions and recessions that began during their tenures. In some cases like the presidency of Bill Clinton, who was in office during one of the most impressive periods of economic prosperity (and bull markets) in history, you won’t see an expansion listed. That’s because credit is awarded to the president who was in office during its inception, which in this case was George H.W. Bush. We also included the ratio of gross federal debt to GDP for the final year of each presidency.
The winner among presidents for the best cumulative stock market return is William J. Clinton, with nearly 210%. The worst: George W. Bush, with -40%. Uncertainty has been the biggest disrupter of markets by far. In September 1955, for example, stocks dove 6.5% in a single day when Eisenhower suffered a sudden heart attack after a golf outing. When Kennedy was assassinated in November 1963 the immediate fall off was 3%. In both instances stocks promptly recovered. Market gyrations aside, investors can take comfort in the fact that in the long run, buy and hold worked best. A $1,000 investment in an index of large U.S. stocks in January 1945, would have compounded at an annual total return of 11% and would have been worth $2.3 million by the end of 2019.
Coming out of the Second World War, war-time production leveled off and job losses ensued. As a result, Truman faced a recession and bear market early in his term. “There were excesses in the economy from so many people returning from war and jobs not being available—it was almost inevitable we were going to hit a recession,” says James Stack, president of InvesTech Research and Stack Financial Management. The economy bounced back quickly as consumer and business confidence returned, but Truman then faced another recession (albeit brief) in 1949 after his Fair Deal economic reforms which raised the minimum wage and tried to guarantee equal employment rights.
While the vastly popular President Eisenhower helped obtain a truce in the Korean War and worked to ease Cold War tensions, America still experienced its share of anxiety during his tenure thanks to Red Scare tactics. “Many people say how great and unexciting the Eisenhower years were, but I beg to differ,” says Sam Stovall, chief investment strategist of CFRA. “America was petrified. Duck and cover was our favorite theme song,” he adds, noting that the Soviet Union acquired the hydrogen bomb during this period and Americans were dealing with McCarthyism and the Wisconsin Senator’s hearings at the same time. Eisenhower faced three recessions during his two terms in office—one in the beginning, middle and end of his tenure. The recessions of 1953 and 1958 were in large part tied to more restrictive monetary policy from the Federal Reserve, while another recession started in 1960—after the Fed had doubled interest rates since 1958.
President John F. Kennedy was elected in a close-run affair, campaigning under the slogans like “Getting America Moving Again” and “A Time For Greatness.” The economy remained sluggish and unemployment remained high at 6.8% when he took office. The one bear market under his term “was triggered by nothing other than Kennedy getting in a pissing match with U.S. Steel over prices,” says Stovall. “Wall Street didn’t like the government dictating what private companies could do.” Toward the end of his term, JFK launched a bold domestic program, including income and corporate tax cuts, to spur economic growth before his tragic assassination on November 22, 1963.
President Johnson was sworn in aboard Air Force One before flying back to Washington on the day of Kennedy’s assassination, and the Texan quickly moved to pass JFK’s tax cuts and Civil Rights legislation. Amid rising inflation and interest rates and rising civil unrest associated with the Civil Rights movement, stocks entered a bear market in 1966. A recession was avoided after the Federal Reserve panicked and reduced interest rates. A second bear market hit in 1968, just as Vietnam War protests were heating up. “There was a valuation and speculation problem on Wall Street that was similar to the late 1990s,” says Stack referring to the so-called go-go era when glamour stocks including IBM, Texas Instruments, Gulf & Western, Polaroid and Xerox led the charge. While Johnson didn’t preside over a formal recession, “he did end up creating problems for the next administration because of the ‘guns and butter’ philosophy of paying for the Vietnam War,” along with Great Society social programs, says Stovall.
Monetary tightening at the end of Johnson’s tenure resulted in a mild recession from 1969 to 1970, after President Nixon took office. The U.S. economy was plagued by stagflation—high inflation, slow economic growth and high unemployment. In 1970, a year before taking the U.S. completely off the gold standard, Nixon, by executive order, imposed a freeze on wages and prices in an effort to battle inflation. “It was a very non-Republican thing to do. It backfired and unraveled shortly after,” Siegel notes. In 1973, the Arab oil embargo led to skyrocketing oil prices, and the Watergate scandal imperiled Nixon’s presidency. A stock market crash cleaved the value of the S&P 500 nearly in half between January 1973 and October 1974, accompanied by double-digit inflation and a 16-month recession that began in the fall of 1973.
President Ford presided over the last two years of Nixon’s second-term, inheriting many of the economic problems of his predecessor. Stagflation continued into Ford’s tenure, but the stock market rebounded in 1975. “It was a very short term in office and not very notable from a historical perspective to investors,” says Stack.
In terms of the economy and the stock market, the peanut farmer and former governor from the state of Georgia didn’t have an easy time in office. Inflation continued to plague the U.S. economy and by 1979 it had reached double-digit levels. “It was a very stressful time for investors and the Federal Reserve,” says Stack, adding that 1980 was the “wildest year in monetary history.” A recession hit in January, but was over by July 1980 after the Fed reversed course and brought interest rates down somewhat. One year later, however, a deeper recession hit shortly after Federal Reserve Chairman Paul Volcker—in an attempt to fight the inflation of the 1970s— “put his foot on the brake by raising interest rates dramatically,” says Stovall. Carter’s term in office was also marked by an energy crisis following the Iranian Revolution that deposed Shah Mohammad Reza Pahlavi in February 1979, and led to revolutionaries seizing the U.S. embassy in Tehran in November and holding hostages until the end of Carter’s presidency. Inflation raged and gold prices spiked to new highs of above $800 per ounce. In November 1980, former actor and California governor Reagan won the presidential election in a landslide.
During Reagan’s first term, the U.S. fell into another recession—one of the longest in the post-war period, but that downturn was long enough that it “broke the back of inflation,” Stack says. The harsh medicine to fight inflation was higher rates that eventually took the U.S. Treasury yield above 16% in August 1981. Stocks bottomed one year later, and the U.S. emerged from recession in November 1982. When the economy rebounded, it was a “big surprise on and off Wall Street that inflation did not rear its ugly head,” Stack adds. Much of the credit goes to Fed Chairman Volcker, who maintained a tight monetary policy by raising rates. “It was a period of triumph. Communism was in decline, and everyone looked to the West as a free market champion,” Siegel says. “There was a huge feeling of being on top.”
Under President Bush, the 41st president, the U.S. economy fell into another recession in 1990, a month before Iraq’s invasion of Kuwait. Oil prices skyrocketed, causing markets to tumble. The Fed had been raising rates to counter inflation once again, Stack says. The economy slowed toward the end of Bush’s term, accompanied by a large commercial real estate bust. Soon after, Bill Clinton’s campaign guru, James Carville, would coin the adage: “It’s the economy stupid.”
While Clinton ran his campaign with the promise of reinvigorating the economy, he “inherited ideal economic conditions” for a stock market boom in the 1990s with inflation falling to less than 3%, Stack says. Clinton pushed a tax hike through Congress early in his first term, and the Fed hiked the federal funds rate from 3.25% in January 1994 to 5% in February 1995. Economic growth cooled, and inflation remained in check. “By putting a cap on inflation pressures, it really allowed for the possibility of the first decade-long expansion in Wall Street history,” Stack says. (Though the expansion technically began under his predecessor’s watch.) The explosion in technology, including the birth of companies like Amazon and Google, helped boost the stock market to record highs, creating a massive bubble. Fed chair Alan Greenspan warned about “irrational exuberance on Wall Street” in 1996, several years before the internet stock bubble popped, but the Fed didn’t respond fast enough. The bubble and subsequent collapse of the Nasdaq led to a bear market in 2000.
As the second President Bush took office, the stock market was still reeling from the dot-com crash: “He couldn’t get anything right—in terms of bad timing and inheriting Clinton’s stock market bubble,” says Stovall. “Bush was book-ended by bears and recessions.” The economy eventually began to recover somewhat as Greenspan and the Federal Reserve methodically raised interest rates again between 2004-2006. But toward the end of Bush’s second term, with interest rates above 5%, the Fed started slashing rates dramatically, setting the stage for a housing bubble. “It set the environment for creating esoteric mortgages…which ultimately became the demise and contributor to the Great Recession,” notes Stack. By the end of Bush’s tenure, the U.S. economy was in the depths of a financial crisis that saw historic institutions like Bear Stearns and Lehman Brothers disappear. “We haven’t had a worse president for the economy than G.W. Bush, at least not since Hoover,” says Charles Lemonides, chief investment officer at ValueWorks.
When President Obama came into office, the country was ready for a rebound from the depths of the Great Recession. By the end of Bush’s term, interest rates had already been slashed, the Fed was increasing its balance sheet with massive monetary injections into the economy and Congress had passed massive bailouts. By mid 2009, the U.S. had recovered from the financial crisis, setting the stage for the longest bull market in history over the following eight years. The lengthy period of expansion under Obama’s tenure was marked by a surge in technology innovation, earnings and reduction of interest rates that in turn caused the stock market to skyrocket to new highs.
The United States was already eight years into the longest economic recovery in history when President Trump was elected. The market jumped right after he won the 2016 election, on hopes that a Republican president would lower taxes and ease business regulation. Trump obliged early on in his presidency. Despite Trump’s claims to the contrary, “by no stretch of the imagination has the market done the best in history,” says Stovall. Major developments like the U.S.-China trade war and the coronavirus pandemic have “been a lot for the market to handle.” With much of the country dealing with lockdowns amid rising coronavirus cases, the United States plunged into a recession in February 2020.
Presidential portraits courtesy of the National Archives and Records Administration