Party in Power and Stock Returns
Posted in Political Indicators
May 22, 2012
Past research relating U.S. stock market returns to the party holding the Presidency mostly concludes that Democratic presidents are better for the stock market than Republican presidents. However, the President shares the power conferred by the electorate with Congress. Does historical data confirm that Democratic control of Congress is also better for stock market returns than Republican control of Congress? Is control of the smaller Senate more decisive than control of the House of Representatives? To check, we relate annual U.S. stock market returns to various combinations of party control of the Presidency, the Senate and the House of Representatives. Using party in power data and annual levels of the S&P 500 Index for 1950 through 2011 (62 years), we find that:
The following chart summarizes average annual S&P 500 Index returns for various combinations of party in power over the entire 62-year sample period. The number in parentheses after each combination is the number of years during which the combination exists. Some subsamples are extremely small. Results broadly suggest that stocks do better when Democrats (Republicans) control the Presidency (Congress).
The various combinations suggest that Republican control of the Senate may be most decisively favorable for U.S. stocks, with:
- Average performance strong when Republicans control the Senate.
- Outperformance (underperformance) under Democratic (Republican) presidents associated with Republican (Democratic) control of the Senate.
In summary, evidence from a limited sample suggests that Republican control of the Senate may be the most decisively favorable party-in-power indicator for U.S. stocks.
The margins of power in the Senate and House of Representatives may be factors, but the small sample/subsample sizes argue against further stratification.
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