As the presidential race heats up, 73 percent of voters say the economy is at the top of their minds. If the S&P 500 index indicates the robustness of the U.S. economy, historical data show the stock market performed better under Democratic presidents than Republican ones. Since 1928, the average annualized S&P returns for a Democratic president in office have been 14.43 percent. For Republican presidents, that number is 8.81 percent. Analyzing time series starting from the end of a major crisis, such as World War II, the 1973 oil crisis and the collapse of the dot-com bubble, returns have consistently been better under Democratic presidents than Republican ones.
However, the historical trend of superior stock performance under Democratic administrations has shifted in recent years. After the 2008 financial crisis, S&P returns averaged 16.65 percent under Republican presidents and 14.69 percent under Democratic presidents. Since 2017, stock market performance under Republicans has nearly doubled under Democrats, with returns of 22.20 percent and 13.83 percent, respectively. This stark difference is driven by massive stimulus injected into the economy in 2020 to combat Covid-19, which caused the S&P 500 and Dow Jones to close the year at record highs. In 2022, the S&P 500 shed nearly a fifth of its value, given the Federal Reserve hiking rates at its fastest in 40 years.
Historical GDP data tell a similar story: Economic growth tends to be steeper under Democratic presidents than Republican ones. In fact, the five highest growth quarters since 1948 all occurred under Democratic presidents, while four of the five lowest came under Republicans.
In a 2016 study, renowned Princeton University economists Alan Blinder and Mark Watson investigated why the U.S. economy has performed much better under a Democratic president. They found that, along with stock market performance and economic growth, wealth inequality tends to decrease under Democratic presidents while recessions become less likely. Looking for causal factors to explain the gap in financial performance between Democratic and Republican administrations, the researchers found that external macro factors like oil shocks, wars and improvements in labor productivity can explain most differences. Specifically, they discovered that exogenous macro factors could explain 56 percent of the gap between economic outcomes of Democratic and Republican presidencies since 1948 and 69 percent of the gap since 1963.
This is not to say presidents have no impact on the economy. After the June 27 presidential debate, which polls suggested hurt President Biden’s chance of re-election, the yield curve steepened. The rise in 30-year yields after the debate indicated market sentiments that Donald Trump’s chance of entering the White House has increased. After President Biden decided not to seek re-election and endorsed his vice president, Kamala Harris, long-term bond yields fell back.
Fluctuations in long-term bond yields reveal presidents’ role in the economy while having little direct impact in the short term. For example, the Clinton administration had little to do with the stock market growth in the 1990s (it was primarily thanks to the internet boom), but administrations from the 1980s to 2000s that directed federal funding to build broadband infrastructure and the internet helped establish the dominance of U.S. tech companies. Similarly, President Biden has had little to do with the recent A.I.-induced stock rally. But investments made by his CHIPS and Science Act will give the industry a boost in years to come.
