U.S. election fever is in full swing. The failed assassination attempt on former president Donald Trump, President Joe Biden’s withdrawal from the race and the anointment of Vice-President Kamala Harris as the presumptive Democratic nominee have only added fuel to the already volatile political environment.
Now it’s time for the endless debate over which political party is best for the economy and the stock market. Mostly, the discussion is partisan, highly emotional and involves a degree of confirmation bias that borders on the unhinged. I decided to look at the historical and economic record of every president since Dwight Eisenhower while attempting to ignore my own biases.
What I found was revealing.
In analyzing this question, these six truths, which make conclusions difficult, must be understood.
The first is that there have been 13 presidents from Mr. Eisenhower to Mr. Biden inclusive – six Democrats and seven Republicans.
Two, despite what most people believe, the stock market does not lead the economy, and the correlation between the two is far lower than assumed. Spoiler alert: The relationship between the stock market and the party of the president is far weaker than pundits assert.
Three, party policies and constituents change. Attitudes toward free trade have switched more than once between parties. The Republicans have become the working-class party as the Trumpsters have pushed the golf club neocons out. Also, what is promised in an election campaign might be different than actual policy.
Four, societal and technological innovations have a profound effect and are always changing, and 2024 America is quite different from the U.S. of 1952.
Five, presidents affect the economy less than their partisan supporters suggest. There is a propensity on both sides to ascribe causality when their guy is in power during good times and blame bad times that coincide with their guy being in power on blind luck.
Six, luck matters, and good and bad policies may only manifest themselves years after a president has left power. Some presidents were fortunate enough to be in power during periods of low real energy prices, while others had to contend with high prices. And, of course, the timing of recessions is a matter of luck. Getting elected during or just after the start of a recession will make a president look like a saviour. A recession or bear market near the end of his tenure will sully his legacy.
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When looking at stock markets during the tenures of various presidents, luck was crucial. A great example of this is Mr. Eisenhower. Under Ike, the S&P 500 increased 8.2 per cent on an annualized basis, in real terms (after inflation), while GDP per capita increased only 0.58 per cent a year. Reality contradicts our collective nostalgia. The S&P 500 index in real terms had an annual negative return of – 15.6 per cent during the Carter administration, but annualized GDP growth was 2.28 per cent. GDP grew under Jimmy Carter at a higher rate than under George W. Bush, Barack Obama, Mr. Trump and Mr. Biden.
There are many factors that affect the stock market and growth, including the business cycle, real oil prices and monetary policy. Lucky presidents usually have a combination of advantages going for them. Ideally, low stock valuations at the beginning of a president’s tenure, low energy prices and leaving power before the next recession helps. Bill Clinton was lucky because he came to power as the economy was recovering from the 1990 recession and real oil prices were the lowest in half a century. He also got out at the end of the dot-com fiasco, escaping much of the blame.
Mr. Obama’s timing was great, as he inherited a stock market that was cheap, battered by the financial crisis. He did not enjoy cheap oil prices. However, even though real stock market returns during the Obama years were almost 10 per cent on an annualized basis, GDP grew at only 1.4 per cent. There was no GDP post-recession bounce for Mr. Obama, as happened in other postwar recoveries. Great for Wall Street financiers, hedge fund managers and owners of businesses dependent on low interest rates and high debt, but a difficult time for the average American worker. The Obama years coincided with a great transfer of prosperity from the middle class to the upper classes.
The S&P 500 under Mr. Biden, in inflation-adjusted terms, has risen about 6 per cent on an annualized basis, not including dividends. Under Mr. Trump, it had an annual real return of 9 per cent.
There seems to be a long-term trend that goes unnoticed. The economy spends less time in an official recession with each subsequent decade, but average GDP growth also declines. Great stock market returns since 2009 have had more to do with low real interest rates and a gigantic rise in valuations. However, assuming things don’t dramatically change over the next few months, the next president will be saddled with higher real interest rates and a chronically expensive stock market. Good economic policy will be good for the economy but might not help the stock market.
There is no definitive proof in the actual data that Republicans or Democrats are significantly different in terms of economic performance. It comes down to variables beyond the president’s control and luck. Even if there was a difference it would be irrelevant. The parties and voters of the Eisenhower/Kennedy era are different than those of the Obama/Trump/Biden era. The country is too.
Presidents should embrace solid economic policies and avoid obvious mistakes but should not expect any credit, especially in a highly partisan society. King Louis XVI of France tried to reform the French tax system to make it fairer and he ended up going to the guillotine anyway.
Tom Czitron is a former portfolio manager with more than four decades of investment experience, particularly in fixed income and asset mix strategy. He is a former lead manager of Royal Bank of Canada’s main bond fund.
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