With the vast differences in U.S. fiscal policy between political parties, one would assume that the party in power of the White House and Congress would significantly influence the stock market. To determine the effect of the party in power on U.S. equity markets, a research engine site examined election results over the years to identify patterns, analyzing the impact of the president’s party on the market and the effect of the U.S. president having the support of Congress by having his party control both the House and the Senate. We also examined what occurs when the president’s party controls just one chamber of Congress, and the other is not (a split Congress). Their data showed that the party in power has no apparent effect on the U.S. stock markets.
How We Evaluated the Market Effect of Elections
To evaluate the influence of U.S. elections on the market, we examined the Dow Jones Industrial Average (DJIA). We measured it at the beginning of October (before the November election) and the end of March the following year. Assessments were to be done before the election when the outcome wasn’t clear and after the new president’s inauguration (if one is elected) in January and the start of the new legislative session when most of the new policies would be clear.
We looked at how the party in power affects the market, how this changes when one party or the other is in charge of Congress, and what happens when Congress is split. Secondly, we discovered that political power has been increasingly fragmented in recent years. Over half (34) of the 60 legislative sessions since 1900 had united governments, meaning that the same party controlled the White House, the U.S. Senate, and the House of Representatives. Yet, only six of the twenty-one sessions of Congress since 1980 have been handled by a single party.
Unified Control: Same Party Holds the President and Congress
In recent decades, periods of united political-party rule have grown less frequent; thus, there are fewer precedents to draw.
Most recently, in 2016, Republican nominee Donald Trump was elected president, and his party had control of Congress.
1 A little more than a month before the 2016 presidential election, the DJIA was 18,250 at the beginning of October. At the end of March 2017, it had risen almost 10% to over 20,000. In contrast, the market declined the last time unified control existed, in 2008 when Democrat Barack Obama was elected president and had the backing of a Democratic-controlled Congress. At the beginning of October 2008, the DJIA was at 10,800, end of March 2009; it dropped 26% to dip below 8,000. It should be remembered, however, that 2008 marked the completion of the subprime lending crisis and the beginning of the global financial crisis; thus, it is still being determined if the downward market trend was driven equally by politics and economics.
In 1992, when Democrat Bill Clinton was elected, the last time there was a united government, the DJIA rose almost 5% from roughly 3,200 in October 1992 to 3,450 at the end of March 1993.
Republican Control of Congress, Democratic Administration
The last time a Democratic president occupied the White House while Republicans controlled Congress was in 2014, during President Obama’s second term. The DJIA was at 17,000 points at the beginning of October, then surpassed 18,000 by the end of March 2015.
Before that, in 1996, President Clinton was in the midst of his second term in office. In early October 1996, before the election, the DJIA was at 5,900; in mid-March 1997, when the Republicans won control of Congress, it had risen to over 7,000. (After a loss of 500 points, the index closed the month around 6,500.)
The market also seems to respond positively to a Democratic president and a Congress controlled by Republicans.
Republican President, Democratic Congress
Before ceding control of Congress to Republicans in 2014, the 2012 general election (one in which both congressional seats and the presidency are on the ballot) produced a Democratic president (Barack Obama) and a divided Congress. When this occurred, the stock markets rose as well. At the beginning of October 2012, the DJIA was at 13,500, but by the end of March 2013, it had risen around 7% to 14,500.
Obama also had a divided Congress after the 2010 elections, during which the DJIA rose almost 14%, from around 10,800 in October 2010 to slightly over 12,200 at the end of March 2011. This historical data indicates that the market responds positively to a Democratic president, even if Congress remains divided.
Republican President, Democratic Control of Congress
When examining what occurs when Republicans are elected president, a similar trend emerges. As indicated before, the DJIA rose almost 10% following Trump’s election in 2016. Yet, markets have also responded positively to Republican presidents, even when the Democratic Party controls Congress. In 2006, during the middle of Republican President George W. Bush’s second term, the DJIA increased by around 6.5%, from approximately 11,700 in October 2006 to almost 12,500 by the end of March 2007, when Democrats assumed control of Congress.
In 1990, when Republican George H.W. Bush was elected president, but Democrats took control of Congress, the DJIA rose almost 16% from approximately 2,500 to over 2,800 by March 1991. Based on these numbers, the market seems to respond positively to a Republican president and a Democratic-controlled House.
Republican President, Congressional Division
The most recent instance of a Republican president presiding over a divided Congress occurred in 2018, during President Trump’s only term.
The DJIA dropped almost 7% from approximately 27,000 to 25,000. To discover another instance, we must return to 1984, the beginning of the second term of Republican President Ronald Reagan. During that time, Republicans controlled the Senate while Democrats controlled the House of Representatives. In October 1984, before the election, the DJIA was about 1,100; by March 1985, it had increased by around 14% to 1,260.
Does the presidential election affect stock prices?
Although the often varied fiscal policies of the two major U.S. political parties would influence the financial markets, depending on which party wins an election, the evidence suggests that the party in power has no discernible effect on the U.S. equity markets.
How do U.S. stock markets respond to a government comprised of a single party?
Historically, the Dow Jones Industrial Average (DJIA) serves as a barometer for the stock market’s reaction to a united government, except for 2008, the beginning of the global financial crisis.
When a Republican president is partnered with a Democratic Legislature, do stock markets decline?
Based on our study, it would seem that the U.S. stock market (through the DJIA) favors a Republican president and a Democratic-controlled House.
The Bottom-line
Although the frequently radically divergent fiscal policies of the two major U.S. political parties should affect markets depending on which party is in power, the evidence suggests that the party in power has no discernible effect on U.S. stock markets. Furthermore, it seems that equity markets respond equally regardless of which party controls Congress (which makes it more difficult for a president to accomplish his program). We found no apparent correlation between the party in power and the market’s direction, regardless of whether the president had the backing of Congress.
