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Benchmarks and the bully pulpit

By: Mat Lystra, Sr. Research Analyst

Theodore Roosevelt reveled in the power of the Presidency as a persuasive force, calling it the “bully pulpit”. A century later the US Presidency is still arguably the most influential position in the world. But how much influence does the President have over the economy, and in particular, the stock market? There’s a wide body of research that explores those questions and the general consensus seems to be: perhaps some, but not much. 

So the reality is, whether you’re hoping for a “Hillary” or a “Trump” victory in 2016, the outcome probably won’t affect Americans’ 401Ks. It’s more likely that intervention by the Fed, oil prices, and international events will dictate growth under the next President.[1]

But despite a lack of strong linkages, for many Americans their President, the economy, and the market are often inextricably intertwined. This makes sense as the President is generally viewed, rightly or wrongly, as bearing some responsibility for most aspects of American life – think Truman and “the buck stops here”.[2] 

With the 2016 election now in focus, our 4th Quarter Small Cap Perspectives Report explores the performance of the Russell 2000® Index across US Presidential elections since 1980. The chart below shows the 48-month cumulative performance of the Russell 2000 Index starting at each of the nine Presidential elections that have taken place in its history. Small caps have finished better under every four-year term except for Bush’s (43) second term which began in 2004. 


48-month cumulative returns for the Russell 2000 Index from each presidential election (Nov – Oct)

Sources: FTSE Russell and MPI Stylus as of Dec. 31, 2015. Certain results shown reflect hypothetical historical performance. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.


In addition to comparing market performance across Presidential terms, there’s perhaps an even larger body of research and commentary assessing whether the economy and the stock market do better under Republican or Democratic administrations.[3] The table below presents a group of characteristics divided by Republican and Democratic Presidential terms. 
 

Returns and volatility characteristics of the Russell 2000 Index under Republican and Democratic Presidencies[4]
Sources: FTSE Russell and MPI Stylus as of Dec. 31, 2015. Certain results shown reflect hypothetical historical performance.  Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.


The data is mixed, pointing to no clear advantage for either party. The Russell 2000 Index posted a positive return 70% of the time under a Republican President and 87% under a Democrat.[5]  However, on average, where there were positive 12-month returns for the Russell 2000 Index it performed higher by 4.3 percentage points under Republican Presidents with no appreciable difference in volatility. 

Theodore Roosevelt so believed in the power of the US Presidency that he ran unsuccessfully for a third term. The current Republican and Democratic Presidential Candidates similarly believe in the power of the office to advance their agenda for the country. But despite the rhetoric, the numbers indicate their influence on the stock market is weak. So while the 2016 Presidential Election will be entertaining, it probably won’t have a huge impact on stock market returns over time.

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[1] Binder, A.S. & Watston, M.S. (2013).Presidents and the Economy: A Forensic Investigation. Princeton University, accessed on 1/7/2015 at: https://www.princeton.edu/~mwatson/papers/Presidents_Blinder_Watson_Nov2013.pdf

[2] For more on the origins of the Truman phrase please read: http://www.trumanlibrary.org/buckstop.htm

[3] Santa-Clara, P. & Valkanov, R. (2003). The Presidential Puzzle: Political Cycles and the Stock Market. Journal of Finance, 58, pgs 1841-1872.

[4] Figures in Table 1 are based on underlying 12-month returns from Nov.-Oct..

[5] Figures in Table 1 are based on underlying 12-month returns from Nov.-Oct..

 

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