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. I 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. Two basic macroeconomic arguments exist that should affect market value between the two parties: differences in the 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 Republicans 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. Unfortunately, the growth and interest rate differences together do not explain the observed difference in equity market returns. A basic OLS approach with annual value weighted market returns minus the corresponding risk free rate as the dependent variable is run. Neither risk free interest rates nor real economic growth are significant in explaining the observed market returns though the party in power is significant predictor.
Highlights
When the Democrats are in the White House, a very large difference is produced in the market returns minus the corresponding risk free rate or the excess return from bearing risk
The real Gross Domestic Product (GDP) growth rate in the economy averaged 4.8% under Democrats and only 1.8% under Republicans from 1929 through 2012
Lower real short term interest rates and greater real economic growth occur under Democrats, but neither of these are significantly related to the market returns
Summary
In the United States, two major political parties exist: The Democrats and the Republicans, commonly referred to the GOP (Grand Old Party). The evidence shows that the equity markets perform much better when the Democrats control the White House even though conventional wisdom is that the Republicans are the political party of business This is not a recent result or a onetime market anomaly, but rather a situation that has existed consistently since Herbert Hoover was President (1929-1933), just after the Center for Research in Security Prices [CRSP] data started. Data are split with the Kennedy administration as he was the first postwar President to pursue economic policies in hopes of affecting real economic outcomes With this split, the excess market returns on average was 12.78% versus -4.36% in the pre-Kennedy period from Hoover through Eisenhower, and still a large 9.23% versus 0.16% in the post-Kennedy period through Obama’s first term in 2012. When the Democrats are in the White House, a very large difference is produced in the market returns minus the corresponding risk free rate or the excess return from bearing risk
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