Politics and Performance: Does Control of the White House Really Matter?

With the Presidential election only one year away, does it matter to the stock market which party wins the White House? The standard response is that the market favors Republican candidates due to their more business-friendly posture favoring lower taxes and less regulation. History, however, is on the side of the Democrats. Since 1945, the average annual gain of the S&P 500 under a Democratic president was 9.7%. Whereas, under a Republican in the White House, the average annual return was only 6.7%.1 What gives?

Since 1945, only two presidents experienced negative market returns during their time in office. And both were Republicans. The first was Nixon from 1969 to 1974, who had the misfortune to preside over the Arab oil embargo in 1973 and Watergate in 1974. The second was George W. Bush whose final year in office was 2008, when the market lost 40% during the Financial Crisis. The best market returns were realized under Republican Gerald Ford, who wasn’t even elected to the presidency.

Source: S&P Capital IQ

Does control of Congress (the Senate and House) matter to the markets? The President shares the power conferred upon him by the electorate with Congress. The chart below shows annual stock market returns with various combinations of party control of the Presidency, the Senate and the House of Representatives. Historically, the market has performed the best under Republican control of Congress with either party in the White House. This is the current situation, with a Democratic president and a Republican Congress. The weakest market returns have occurred with a Republican president trying to work with a Democratic or split Congress. Think back to Nixon’s five years in office and George W’s first two years in 2001 and 2002, with returns of -13% and -23%, respectively.

Source: CXO Advisory “Party in Power and Stock Returns”

So, what’s an investor to hope for over the next year? Does the party in the White House really make a difference? Our founding fathers creation of the various branches of government has served us well. Digging further into the details, the various combinations suggest that Republican control of the Senate, or the House, may be the most favorable factor for the U.S. stock market, and not necessarily which party controls the White House. The average annual return of the stock market with a Republican Senate has been 16.5% through 2014.

1Source: S&P Capital IQ

David G. Carroll is Senior Vice President and Senior Portfolio Manager for Cleary Gull

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