2021: The presidential factor

12/24/20
  • Dow has tended to outperform in the first years of first-term presidents
  • Wide range of returns, though—from +63% to -17%
  • Other factors likely to be more influential than prez or party

We’ve elected a new president—is the stock market likely to care?

Some people may think so, given the market’s performance during the first year of other first-time occupants of the White House.

The chart below summarizes stock market performance in the first full calendar years of first-term presidents, going back to 1925. It compares the Dow Jones Industrial Average’s (DJIA) median returns for (left to right): 1) all years that weren’t the first years of new presidencies, 2) the first years of all first-term presidents, 3) the first years of first-term presidents that represented a party change (like this year's election), 4) the first years of first-term Democratic presidents, and the first years of first-term Republican presidents:

Chart 1: Median Dow returns in first year of first-term presidents, 1925–2017

Source (data): Power E*TRADE


The quick takeaway:

●Overall, the market performed better in the first full year of first-term presidents (13%-plus) than it did in all other years (7.5%), with the strongest performance coming under Democrats.

So, given we have a first-term Democrat moving into the White House, are we looking at a potentially better-than-average year in 2021? The table below, which shows the individual results, highlights the fact that besides there being only 15 first terms since 1925 (not a lot to go on), there was quite a wide range of returns from year to year:

Chart 2: Dow returns in first year of first-term presidents, 1925-2017

Source (data): Power E*TRADE. *First full term; served partial term after predecessor died in office.


Also, the Dow was up in 10 of the 15 first years (67% of the time)—which is actually slightly lower than its overall percentage of up years (68%).

It’s always interesting to ponder how politics and the markets intersect, but the caveat of this type of analysis is always “correlation does not imply causation.” There may be reasons to think that new presidential initiatives can alter the course of the economy and fuel market enthusiasm (and you can find historical examples that possibly support that argument), but in most cases it’s difficult to draw a straight line between a specific person, party, or policy and how the market performs over time.

And in times like these, traders are better served keeping their radar tuned to more tangible factors—the course of a pandemic, for example.

 

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