Why Market Returns Favor Democrats in the White House?

Abstract

This study attempts to explain why the equity market earns greater returns for bearing risk when a Democrat is President in the USA versus a Republican. We look at data from 1929 through 2012. The data show that the value weighted return minus the corresponding period’s risk free rate is 10.83% when a Democrat is President, versus a corresponding return of -1.20% under Republican Presidents. We see the two basic macroeconomic arguments that should affect market value between the two parties: differences in risk free interest rates and differences in economic growth. On average the Democrats follow a policy of low interest rates. The rate of return on short term T-bills averages 4.55% under the GOP and a 2.48% under Democrats. Further, the Democrats overall economic policies create a higher average real growth rate with a 4.8% average versus only 1.8% under Republican administrations. These together do not explain the differences in equity market returns. Using a basic OLS approach with annual value weighted market returns minus the corresponding risk free rate as the dependent variable, neither interest rates nor real economic growth are significant in explaining returns though the party in power is significant.