Will Joe Biden be good for investors? Why I disagree with Geoff Wilson

Do investors in American – and, by implication, global – markets receive higher returns when Democrats occupy the White House? Over the past few months, several journalists, an eminent finance academic and a prominent Australian investment manager, among others, have contended – sometimes emphatically – that they do. Most recently, The Australian (1 December) quoted Geoff Wilson, the founder and head of the “Wilson Asset Management listed investment company empire.” Its headline was unequivocal: “Why Biden Will Be Good for Shares.”

Investors should doubt it. It’s not obvious to me that returns rise because (or even when) the president is a Democrat. Indeed, this proposition contains three key weaknesses. First, it’s ambiguous. If it’s true, is actual cause or mere correlation at work? In other words, do Democrats deliberately boost returns, or have they simply been lucky – that is, held office at opportune times? If the effect is intentional, why do Democrats produce higher – and Republicans lower – returns?

Secondly, and in both financial and political terms, this assertion’s proponents are oddly incurious. There’s no shortage of claims that owners of stocks receive higher returns under Democrats; but nobody, it seems, says anything about blue administrations’ impact upon bonds. Are bonds’ as well as stocks’ returns greater under Democrats? If not, why not? Then there’s the U.S. Constitution: to a considerable extent, a president can do only what Congress and the Supreme Court allow him to do. Why, then, have the implications for investors of the president’s partisan stripe attracted much attention, but the control of Congress virtually none?

Finally, analyses of this claim are usually arbitrary and subjective: they typically use various starting points since the Second World War, but seldom justify them – and ignore earlier years. They’re also makeshift: they make no attempt to assess partisan political influences net of financial ones.

 A New Analysis Overturns an Old Assertion

This article redresses the second and third weaknesses. Its analysis shows that Geoff Wilson and others are diametrically incorrect: Democrats’ control of the presidency has been associated, on average over the past 150 years, with LOWER (and Republicans’ control with higher) short-term (that is, 12-month) real total equity returns. Owners of stocks also tend to receive lower returns when Democrats control the Senate and House of Representatives. Results in bond markets are much the same: bondholders tend to receive higher short-term returns during Republican presidencies and when Republicans control the Senate, but lower returns when they control the House.

An analysis of long-term (10-year, expressed on an annualised basis) total real returns demonstrates that Wilson and others have overstated their case:

1. The boost to investors when a Democrat occupies the White House has been intermittent. Specifically, only ca. 20% of the time have the S&P 500’s subsequent long-term returns been clearly higher during Democratic administrations; 40% of the time, Democrats have a slight edge; and the rest – almost half – of the time, returns have been higher under Republican presidents.
2. Further, compared to investment fundamentals such as the stock market’s PE ratio, the impact of the president’s party has been minor.
3. Lastly, if past is prologue and given today’s unattractive – and, I believe, dangerous – valuations, a victory by Donald Trump at the November election would’ve served the interests of long-term investors somewhat better than Joe Biden’s is likely to do.

 A Recent Spate of Assertions

According to Geoff Wilson,

It is worth noting that historically the U.S. equity market has performed better under a Democratic president. Since the inauguration of Theodore Roosevelt [a Republican who took office following the assassination of William McKinley] in September 1901, when a Democrat was president the Dow [Jones Industrial Average] delivered an annual return of 6.2%. When a Republican was president the Dow delivered an annual return of 3.7%. That is an 81% outperformance.

The Australian added: “Wilson hopes history will repeat itself … he believes the election of Joe Biden as U.S. President will be positive in terms of ‘social, geopolitical and, potentially, economic’ outcomes for the global economy.” “With that in mind,” he is “cautiously optimistic as he looks towards 2021 …” 

HuffPost was even more forthright. “The historical record and the research on the divide between stock market performances assessing Democrat and Republican administrations is clear,” it quoted an analyst on 14 October. It also cited CFRA Research: “since 1945, the S&P 500 has averaged an annual gain of 11.2% when Democrats controlled the White House, versus an average 6.9% gain under Republicans.” HuffPost concluded: “even if you exclude the Great Recession and COVID-19 pandemic – both of which occurred while a Republican was in office – the data still [show] stronger performance when Democrats [inhabit] the White House.”

“In an effort to more closely examine the relationship between the actions of a president and the direction of stocks,” Forbes (23 July) “analyzed their stock market performances, including dividends, dating back to Harry Truman [who became president in 1945].” Using data from the National Bureau of Economic Research (NBER), it “noted for each president the number of expansions and recessions that began during their tenures. In some cases like the presidency of Bill Clinton, who was in office during one of the most impressive periods of economic prosperity (and bull markets) in history, you won’t see an expansion listed. That’s because credit is awarded to the president who was in office during its inception, which in this case was George H.W. Bush.” Finally, CNN was true to its strident, anti-scientific, blatantly partisan and egregiously mistaken form. “Stocks Perform Better when a Democrat is in the White House. History Proves It,” asserted its headline on 23 September.

Three Weaknesses

The contention that investors receive higher returns when Democrats occupy the White House contains three key weaknesses.

Weakness #1:

Morgan Housel expressed it sagely:

In general, presidents get too much credit for the economy when things are good, and too much blame when things are poor. We tend to imagine every blip in the stock market and every unemployment report as a direct reflection of a president’s policies – particularly during election years. In reality, Congress and the Federal Reserve probably have just as much, if not more, sway over the economy than any president. And one president’s policies can spill over into the next administration, making it difficult to sort out who is liable for what. We have a hard enough time accurately measuring what the economy is doing, let [alone] assigning responsibility for its moves.

Forbes inadvertently highlighted one of the difficulties that Housel mentioned. If “credit is awarded” to a president for the purportedly good policies which presumably begat the higher stock prices which occurred under his successor’s watch, then why didn’t it also deduct credit from those who pursued the poor policies (such as short-term “sugar hits”) which boosted stocks during his term but cruelled them during his successor’s? In both cases, the analyst doesn’t merely have to make arbitrary assumptions: she must somehow apply them dispassionately across time and partisan stripes. Adding to this great difficulty is insuperable subjectivity: many policies benefit some people and harm others; and a policy’s effect may be “good” during one presidency but “bad” in another.

Another capricious (but easily rectifiable) choice afflicts these studies: why do most of them focus upon the years since the Second World War? According to Charles Weeks, “obviously [earlier years were] a long time ago, so some might argue [they] are no longer relevant.” That claim isn’t merely unsubstantiated; it raises additional difficulties. Before what year does history become immaterial? On what basis? Analysis published by Vanguard on 20 September concluded: “since 1860 a balanced portfolio of 60% stocks and 40% bonds has returned 8.2% under Republican presidents and 8.4% under Democratic presidents.” Have most “analysts” fixated upon the post-WWII era because it provides the results they desire?

Similarly, Matthew Fox cited “Liberum, a UK-based investment bank, [whose analysis of] historical stock market returns and annual GDP growth [makes] the case that a Republican president’s drive to cut taxes and reduce government spending often leads to lower economic expansion and stock market returns than when a Democratic president is in office.” As Alberto Alesina and others have amply and rigorously demonstrated, the polar opposite is much closer to the truth. Almost a century has elapsed since a Republican president cut spending; during that time, expenditure under all presidents has risen inexorably. More than that: as time has passed, its rate of increase has become exponential – and each successive president’s profligacy, regardless of party, has exceeded his predecessor’s. 

Weakness #2:

In the age of “Imperial Presidency,” which has existed roughly since the administrations of Franklin D. Roosevelt (1933-1945), the president wields far more power than a strict reading of the Constitution permits. Yet the executive doesn’t control everything; it shares power with the legislative and judicial branches. Historically, even when the same party has controlled the White House, Senate and House of Representatives, major struggles between Congress and President have repeatedly erupted. And the number of instances in which a Republican Senate or House has thwarted a Democrat president (or vice versa) are legion. That’s precisely what the architects of the U.S. Constitution intended. Control of the White House doesn’t mean control of the entire government; bluntly, a president can do only what Congress allows him to do.

 Weakness #3:

The claim that investors receive higher returns under Democrat presidents is often (as in The Australian on 1 December) unreferenced. Perhaps that’s because the underlying analysis is usually rudimentary. Table 1, which restates Charles Weeks’, is typical. He concentrates upon the most recent handful of presidencies; notes the S&P 500’s total return during each calendar year (or part thereof) of a president’s tenure; computes the mean return during each presidency; and draws inferences. Since 1981, during years when a Democrat has occupied the White House, the S&P’s return has averaged 14.1%; under Republican presidencies (I’ve updated the Index’s return to 1 December 2020 as a proxy for this year), it’s averaged 6.9%. Weeks makes no attempt to assess political influences net of economic and financial ones.

Table 1: S&P 500, Total Return per Calendar Year of Presidency, 1981-2020

Redressing Weaknesses #2 and #3

Any analyst should use as much valid, reliable and comparable data as possible. And the S&P 500 is broader and more inclusive than the Dow Jones Industrial Average; for these reasons, I’ve re-analysed the data that Robert Shiller collated and used in Irrational Exuberance (Princeton University Press, 1^st ed., 2000). To his monthly observations (or extrapolations) of the Standard & Poor’s 500 and indexes since January 1871, I’ve appended other data, also monthly, namely the party controlling (1) the White House, (2) Senate and (3) House of Representatives.

On average from January 1871 to September 2020, the S&P 500 generated an annualised, real and total return of 8.2%. This return is “annualised” in the sense that it takes each month’s return and multiplies it by 12; the return is “total” because it includes both capital growth and dividends; and it’s “real” (as opposed to nominal) in the sense that it incorporates changes in the purchasing power of money. During this same period, bonds generated an average annualised, real total return of 4.8%. Under Democratic presidencies, stocks’ mean return is 8.0%; under Republicans it’s 8.3% (Table 2). That’s a “Republican excess return” of 0.3 percentage points. On average, the S&P 500’s return is also higher when Republicans control the Senate (excess return of 3.0 percentage points) and House of Representatives (3.9). Bondholders also receive higher returns under Republican presidents (2.4) and Senates (1.4).

 Table 2: Annualised Real Total Return, U.S. Stocks and Bonds, 1871-2020, by Partisan Control of Three Institutions

Only one of the six scenarios in Table 2 favours Democrats. What others have purportedly found since the Second World War (and Geoff Wilson has contended since the beginning of the 20^th century) doesn’t apply more generally. Two sets of reasons, it seems to me, explain this discrepancy: one is historical-economic and the other is partisan-political. First, these data extend back into the mid-19^th century; they also incorporate the effect of changes of the purchasing power (PP) of money. An increase of PP, other things equal, augments investors’ real return. If, for example, during a given 12-month period the S&P’s total nominal return is 4% and the purchasing power of money rises 2%, then the period’s total real return is (1 + 0.04) ÷ (1 - 0.02) = 6.1%.

This confluence of positive nominal return and rising PP was the norm from the 1870s to the First World War – a period during which Republicans dominated the presidency and, to a lesser extent, the Congress. During the half-century from the Civil War until 1912, Americans elected only one Democrat as president. Conversely, a decrease of PP crimps investor’s real return. If during a given 12-month period the S&P’s total nominal return is 4% and the purchasing power of money shrinks 2%, then one’s total real return for the period is (1 + 0.04) ÷ (1 + 0.02) = 1.9%. This combination of positive nominal return and falling (indeed, cumulatively collapsing) PP was the norm from the Great Depression until the 1990s – a period during which Democrats dominated the presidency and the Congress.

 Note that in partisan terms there are two possible presidencies (one Democrat, the other Republican), two possible Senates (Dem or Rep) and two possible Houses (ditto). So that’s 2 × 2 × 2 = 8 scenarios. Table 3 computes stocks’ and bonds’ average annualised real total returns under each. Three of the eight scenarios occur rarely; accordingly, it’s hard to draw clear inferences from these results. Two, on the other hand, occur most regularly: more than half of the time (27.8% + 26.1% = 53.9%), one party has simultaneously controlled all three institutions. When Republicans have ruled the roost, equities’ total real return has averaged 12.1% per year and bonds’ 4.1%. Each of these returns is greater than when Democrats dominate all three bodies.

Only once in U.S. history have Democrats controlled the White House and the Senate but Republicans have controlled the House. That combination occurred during Barack Obama’s first term. That period comprised less than 3% of the time since 1871; hence it’s hard to generalise the very high returns that occurred during these years. Similarly, we shouldn’t read too much into the S&P’s loss when the presidency and House are Republican but the Senate is Democrat: that permutation, too, has occurred only once, in 1881-1883, when Chester A. Arthur (whom few remember) was president.

Table 3: Annualised Total Real Return, U.S. Stocks and Bonds, 1871-2020, Eight Variations of Partisan Control of Three Institutions

What seems likely to emerge in January (i.e., a Democrat in the White House, a Republican Senate and a Democratic House) is also rare. It’s happened less than 3% of the time since 1871, i.e., between 1885 and 1889, so inferences are hazardous. That interval encompassed Grover Cleveland’s first term (thus far, he’s been the only president who served two non-consecutive terms; the second was in 1893-1897).

Why were the S&P’s returns so high under Cleveland’s first administration? Let’s bear in mind the inexorable and perhaps insuperable difficulty of inferring from alleged cause (a president’s actions) to effect (investors’ returns). But let’s also note that, according to Wikipedia, “Cleveland was the leader of the pro-business Bourbon Democrats who opposed high tariffs and inflation [and thus championed the gold standard]; [he also rejected and refused to enact] subsidies to business, farmers, or veterans;” and his “crusade for political reform and fiscal conservatism made him an icon for American conservatives of that era.” He “won praise for his honesty, self-reliance, integrity, and commitment to the principles of classical liberalism,” and “fought political corruption and patronage.” Indeed, “the like-minded wing of the Republican Party, called ‘Mugwumps,’ largely bolted the GOP presidential ticket and swung to his support in the 1884 election [which swept him into the White House].”

Clearly – and unfortunately – these principles and actions bear absolutely no relation to today’s Democrats’ (or, for that matter, Republicans’). I’d rejoice if Joe Biden impersonated Grover Cleveland and abolished the Fed, re-established the gold standard, practiced free (as opposed to managed) trade, slashed the government’s expenditure and taxes (and hence its revenues) to the bone and eliminated regulations by the trainload, repatriated the troops and otherwise did nothing – and thus let a private-property, free-market, capitalist economy rip. But I doubt that any of these things appear on Biden’s “to do” list!

Party-Political Effects Net of Investment Fundamentals

Thus far I’ve analysed short-term total real returns. From the point of view of today’s long-term investor, who’s prepared to buy and hold for a decade, does the U.S. President’s partisan stripe matter? Under current circumstances it probably doesn’t – at least not much. Indeed, if the past is prologue, then regardless who won the presidential election in November and who takes the oath of office in January, stocks’ and bonds’ prospective returns are meagre. I segregated each month since January 1871 into two categories: Democrat or Republican president. For each category, I then rank-ordered observations according to the S&P’s PE ratio during that month. Specifically, I divided each category into five quintiles (i.e., ranked piles of observations, each of which, net of rounding, contains the same number of observations). Next, for each observation I computed the S&P 500’s annualised real rate of total return during the next decade; for January 1871, for example, during which the Republican, Ulysses S. Grant, was president, I computed the Index’s annualised real rate of return during the ten years to January 1881, and so on for each successive month. Finally, for each quintile I computed the mean return. 

Table 4 summarises the results. Four points are noteworthy. First, regardless of which party holds the presidency, a tenet of value investing prevails: looking down the two “Subsequent Return” columns, the higher is the current PE ratio, the lower is the S&P’s subsequent return. The lower the S&P 500’s current yield (the inverse of its PE ratio), in other words, the lower is its return during the next ten years. The second point is that the first point is bad news for today’s bulls: currently (November 2020), the S&P’s PE ratio approached 35. That clearly places it in the highest quintile of observations (indeed, the highest 2% of all observations) – which implies that the S&P’s annualised total real return during the next decade will be modest. If this historical relationship holds during the next few years, then in terms of Weeks’ results in Table 1, Biden is more likely to be a “George W. Bush” (average S&P 500 calendar year return of 4% per year) than a “Clinton” (15%) or Obama (12%).

Table 4: Subsequent (10-Year Annualised) Total Real Equity Returns, by Party and Current PE, 1871-2020

Thirdly, the higher is the PE ratio, the lower, generally speaking, is the advantage to investors (whether causal or accidental) of a Democrat in the White House. When PEs are lowest, the “Democrat excess return” is 12.5% - 9.8% = 2.7 percentage points (pp). In the second and median quintiles, it shrinks into insignificance; and in the upper two quintiles – comprising 2 × 20% = 40% of total observations – it disappears and a “Republican excess return” appears. Here’s a tongue-in-cheek message to Geoff Wilson and others: if you really want higher returns, then at November’s presidential election you should have supported The Donald – and should now be claiming fraud and demanding a recount!

Finally, and whether it’s actual cause or mere correlation, the effect of the president’s party affiliation upon the S&P’s subsequent returns is, compared to the market’s PE ratio, intermittent and at best modest. Crudely, when a Democrat has occupied the White House, investors’ subsequent long-term returns per quintile have varied from a minimum of 3.8% to a maximum of 12.5%; that’s a difference of 12.5 - 3.8 = 8.7 percentage points and (12.5 – 3.8) ÷ 3.8 = 228%; during Republican presidencies, the returns have varied by 5.1 percentage points and 109%. In contrast, the maximum differential (Democrat versus Republican) rate of subsequent return occurs at the lowest quintile of PEs – and is just 2.7 percentage points and 28%. Compared to the market’s current valuation, in other words, the president’s party affiliation exerts little influence upon investors’ subsequent long-term return.

I repeated the exercise for current bond yields and bonds’ subsequent long-term returns. Instead of PE ratio, I rank-ordered and stratified by what Shiller’s data call the current “long-term interest rate.” Table 5 reports the results. Its gist is that, for all practical purposes, there’s no Democrat excess return. Quite the contrary: in four of the five quintiles a Republican excess return exists. More importantly, and regardless of the president’s partisan stripe, the higher is the current yields the higher is the subsequent long-term return. Finally, the impact of current yield upon subsequent return is stronger than the impact of current president.

Table 5: Subsequent (10-Year Annualised) Total Real Bond Returns, by Party and Current Long-Term Rate of Interest, 1871-2020

Conclusion

Leithner & Company’s approach to investing is resolutely value-based, research-driven and conservative-contrarian. We distrust soft words and seek valid logic and reliable data. Consequently, over the years it’s occurred repeatedly: we note that journalists, prominent people, etc., agree that such-and-such is a fact; we doubt them and their (often unsubstantiated) assertions; conduct our own analyses; and frequently find that what others  say just ain’t so.

“Stock markets do perform better under Democrats than under Republicans. That’s a well-known fact,” Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania, told Forbes (23 July 2020). No, it isn’t: since the 1870s, and taking into consideration the purchasing power of money, short- and long-term returns of stocks and bonds and control of the Congress as well as presidency, it’s an artefact. If you’re a speculator (for whom the short-term is all-important), then on average over the past 150 years equities’ short-term total real returns have been higher under Republican presidents and Congresses. Ditto, for the most part, bonds’. Is this “Republican excess return” the consequence of correlation or cause? I don’t know and I don’t care: if you’re a long-term investor, it’s irrelevant. The much stronger effect – stocks’ and bonds’ yields – does matter: the higher is the S&P 500’s current PE (and the lower is bonds’ current yield), then – regardless of the president’s party affiliation – the lower are their subsequent long-term returns.

Siegel, the author of Stocks for the Long Run (McGraw-Hill, 1^st ed., 1994) stood on much firmer ground when he told Forbes that that many investors’ obsession with politics is mostly misplaced: “Bull markets and bear markets come and go, and it’s more to do with business cycles than presidents.” MacKenzie Sigalos also grasps the crux. “For investors worried about how [an] election will impact their portfolios over the long haul,” she advises, “fear not: elections have seldom had a lasting impact on equity prices.” Charles Weeks’ wisdom gets the last word: 

Ultimately, political parties don’t matter much [to investors] – what matters are the length of time you leave your money in the market, and fundamentals … First and foremost, [fundamentals are] not about politics. In fact, … politics matters very little, which is great news for all of us.

References

1. Alberto Alesina, Austerity: When It Works and When It Doesn’t, Princeton University Press, 2019.
2. Casey Bond, “The Stock Market Does Better When Democrats Are in the White House,” HuffPost, 14 October 2020.
3. Matt Egan, “Stocks Perform Better when a Democrat is in the White House. History Proves It,” CNN, 23 September 2020.
4. Matthew Fox, “Democratic Presidents Are Better for the Stock Market and Economy than Republicans, One Study Shows,” Business Insider, 25 August 2020.
5. Morgan Housel, “The Best Presidents for the Economy,” The Motley Fool, 25 October 2012.
6. Sergei Klebnikov and Halah Touryalai, “We Looked at How the Stock Market Performed Under Every U.S. President Since Truman — and the Results Will Surprise You,” Forbes, 23 July 2020.
7. MacKenzie Sigalos, “Stop Stressing about which Party Is Better for the Stock Market: the Data Shows It Doesn’t Matter Much,” CNBC, 3 November 2020.
8. Vanguard Group, “Elections Matter, but not so Much to Your Investments,” 20 September 2020.
9. Charles Weeks, “I’m a Financial Planner, and My Clients Always Panic about Their Investments around a Presidential Election. Here’s what I Tell Them,” Business Insider, 20 October 2020.