Helping you make wiser investment decisions

Republicans or Democrats: Who Is Better for the Economy?

September 8, 2020 Joachim Klement, CFA
Republicans or Democrats: Who Is Better for the Economy?


We’re in the midst of another US presidential election. And as we do every four years, we’ll hear talk about the presidential cycle and why Republicans, because of their more business-friendly policies, are better for the economy and stock markets than Democrats.

But as with so much common knowledge, the evidence for this is much more ambivalent than the conventional wisdom would suggest.

Subscribe Button

If we calculate the average annual real GDP growth in the United States under Democratic and Republican presidents going back to 1947, the economy grew one percentage point faster on average under Democratic than Republican presidents.

Now, a legitimate counterpoint might be that the last two major economic crises — the global financial crisis (GFC) of 2008 and the COVID-19 crisis of 2020 — occurred under Republican presidents. So what happens if we filter our sample, eliminating the two crises and halt our analysis in 2006? The difference in real GDP growth . . . grows even larger.


Real GDP Growth: Republican vs. Democratic Presidents


But then GDP growth is only one measure of economic progress. What about the equity markets? After all, Republicans have long championed the tax cut, which should help shareholders keep more of their dividends and capital gains and thus result in better stock market performance.

Here again the data does not support the conclusion. In fact, the outperformance of Democratic administrations relative to their Republican counterparts, in total returns and adjusted for inflation as with GDP, is even greater. Even if we exclude the last two crises, stock market performance under Democratic presidents is still miles ahead of Republican presidents. It isn’t even close.


Real Stock Market Performance: Republican vs. Democratic Presidents


But this is just the picture in the United States. Does the same dynamic apply in other nations with similar left-right two-party systems?

In the United Kingdom, the appeal of the center-right Conservatives is based in large measure on the premise that they are better stewards of the markets and economy. And because the prime minister is guaranteed a majority in Parliament, they should have an easier time enacting their policies than an American president whose party may not control one or both houses of Congress. So if the Tories are right, Conservative outperformance relative to the Labour Party should be clear and unambivalent.

But economic growth was still stronger under Labour than Tory governments. And again, if we filter out the last two economic crises and end our sample period in 2006, Labour’s outperformance gap only increases.


Real GDP Growth: Conservative vs. Labour Governments


There is one difference, however: Under Tory governments, the UK stock markets have indeed outperformed and by a considerable margin relative to Labour governments.


Real Stock Market Performance: Conservative vs. Labour Governments

Source: FTSE

So how do we make sense of all this?

We could try to explain why stock markets have done better under Democratic presidents and Tory prime ministers or why GDP grew more under Labour and Democratic governments and administrations. But what the analysis demonstrates is that there is a great deal of luck involved in stock market and economic performance.

Thus, we should just ignore claims that one party or another is better for markets because in the end it probably doesn’t matter all that much and, regardless, past performance is no guarantee of future results.

Indeed, it may be worth dusting off and repurposing the perhaps apocryphal words of the late Tory prime minister Harold Macmillan. What determines market movements isn’t so much which party is in power, but rather “Events, dear boy, events.”

For more from Joachim Klement, CFA, don’t miss 7 Mistakes Every Investor Makes (And How to Avoid Them) and Risk Profiling and Tolerance, and sign up for his Klement on Investing commentary.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / OsakaWayne Studios

Joachim Klement, CFA

Joachim Klement, CFA, is a trustee of the CFA Institute Research Foundation and offers regular commentary at Klement on Investing. Previously, he was CIO at Wellershoff & Partners Ltd., and before that, head of the UBS Wealth Management Strategic Research team and head of equity strategy for UBS Wealth Management. Klement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland, and Madrid, Spain, and graduated with a master’s degree in mathematics. In addition, he holds a master’s degree in economics and finance.



Source link