Revisiting Party in Power and Stock Returns
Posted in Political Indicators
June 16, 2009
Past research relating U.S. stock 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 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 stock 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 2009 (partial), we find that:
The following chart summarizes average annual returns for various combination of party in power over the entire 60-year sample period. The number in parentheses after each combination is the number of years during which the combination exists. Some subsamples are very 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 stocks, with:
- Average performance strong when Republicans control the Senate; and,
- Outperformance (underperformance) under Democratic (Republican) presidents associated with Republican (Democratic) control of the Senate.
The current combination of Democratic control of both the Presidency and Congress relates historically to average stock market performance.
In summary, limited evidence suggests that Republican control of the Senate is most favorable for stocks, and that the current Democratic control of the Presidency and Congress relates to average stock market performance.
