When Do Political Parties Influence Stock Markets?

Sometimes, stock markets behave unpredictably:

But we can ask if politics provides a crystal ball.

Stock Markets and Politics

Currently, the Democrats in the Senate, and the Republicans in the House, have a slim margin. Meanwhile, a Democrat is in the White House. All is so close, that the November elections could bring one party control throughout government or this continuing divide.

During May, U.S. Bank (5th largest in the U.S.) published a study that looked back to 1948 for 75 years of markets and elections. They asked if the party in control enjoyed unusually buoyant stock market returns. While their statistical approach was somewhat more complex, essentially, they compared 75 year 3-month averages to “average 3-month returns following each election outcome.”

Very generally, they found that divided government was good for markets. More specifically, a Democrat in the White House with a Republican Congress, and “split party control” of the Congress resulted in above average stock market returns.

By contrast, when a Republican was in the White House, and Democrats dominated the Congress, the returns were a plus but below long term averages.

Our Bottom Line: Stock Market Indices

Since we’ve used the Dow and the S&P 500 as stock market yardsticks, we should take a brief look at them. Both can be called barometers of stock market activity.

First published in 1896, the Dow Jones Industrial Average has been composed of 30 major firms since 1928. We could call the Dow a stock “Hall of Fame” because its components, all pacesetting companies, are removed from the average when they decline.

Much more recent, the S&P was created in 1957 and rapidly became a “world standard” for market performance because of its 500 leading companies. Also an index that is updated as the economy and firms evolve, it has 8 sectors:

• Materials
• Industrials
• Energy
• Consumer Discretionary
• Consumer Staples
• Health Care
• Financials
• Information Tech

And finally, we should note that specific industry groups can differ from the averages. In addition, dates matter. When observing market fluctuations, one time frame can vary considerably from another. And finally, more than politics, statistics indicate that the trajectory of the GDP and inflation have more of a stock market impact.

However, with all of this in mind, we can decide if stock markets and politics have a connection.

My sources and more: Browsing, I discovered this U.S. bank article and white paper.