October 2024 Market Commentary

October 2024 Commentary

In this month’s commentary, Kristin Ketner Pak and I discuss our team’s views regarding the impact on equity market returns of US Presidential administrations and unified or divided Congresses.

Returns Per Presidential Political Party

We often get the question if the equity markets are better off under Democratic or Republican Presidential administrations and if they are better off under unified governments, meaning one political party is in power in the White House and Congress, or divided governments. A follow-up question we usually get is, “Should I sell/buy if so-and-so is expected to win/lose the presidential election?”

As shown in Exhibit 1 below, U.S. equity markets (represented in this discussion by the S&P 500)[1] have generally performed better under Democratic than Republican administrations on a price return basis. This is somewhat surprising considering that Republicans have historically been perceived as the more “business-friendly” political party. The chart analyzes the following scenarios:

• When there is a Democratic President and the Democrats control both houses of Congress, invest in the S&P 500; otherwise, invest in three-month T-Bills (“Democrat/Yes”).
• When there is a Democratic President and the Democrats do not control both houses of Congress, invest in the S&P 500; otherwise, invest in three-month T-Bills (“Democrat/No”).
• When there is a Republican President and the Republicans control both houses of Congress, invest in the S&P 500; otherwise, invest in three-month T-Bills (“Republican/Yes”).
• When there is a Republican President and the Republicans do not control both houses of Congress, invest in the S&P 500; otherwise, invest in three-month T-Bills (“Republican/No”).

The chart also shows similar strategies depending only on the party of the President (“Democrat” and “Republican”).

Using this methodology, the strategy averaged 7.3% annualized price returns under Democratic Presidents compared with 4.6% under Republican Presidents. Democratic Administrations outperformed Republican Administrations by 3.0% on an average annual basis when the government has been divided and only slightly underperformed by 0.33% when the presidential political regime has controlled both the White House and Congress. The cumulative return on three-month T-Bills for the period was about 4.0%.

One note on the numbers: these are price returns. Including reinvestment of dividends would result in significantly higher total returns. For example, while the annualized price return of the S&P 500 since 1954 has been about 7.99%, the equivalent return including dividends would be 11.26%.

EXHIBIT 1: ANNUALIZED PRICE RETURNS OF THE S&P 500 SINCE 1954 UNDER DEMOCRATIC AND REPUBLICAN PRESIDENTIAL ADMINISTRATIONS WITH CONGRESSIONAL CONTROL (“YES”), WITHOUT CONTROL (“NO”) AND REGARDLESS OF CONTROL*

*Based on daily data from 12/31/1953 to 9/27/2024

Source: Bloomberg, Federal Reserve, AAFMAA Wealth Management & Trust LLC

It's Hard to Draw Relevant Conclusions

Despite this differential in equity market returns under the two political party administrations, we believe it is hard to draw relevant conclusions as to what impact the presidential administration really has for multiple reasons: whether a party actually has control over policy implementation despite their numbers in the House and Senate isn’t always obvious, there are too few distinct periods to analyze, and there are far too many other factors.

First, determining “who is in charge” can be a tricky exercise. The concept of controlling Congress itself is vague.

We consider a party to have controlled Congress if it had a majority of seats in both chambers. However, a party majority of one, two, or even three votes in either chamber is a small margin which doesn’t necessarily translate into an automatic sweep of a President’s agenda.

As Exhibit 2 shows, since 1928 there have been only 21 distinct periods when the president’s party either continually controlled Congress or did not control Congress. While the historical record is fascinating, we believe it’s too limited a data set to draw relevant conclusions.

EXHIBIT 2: DISTINCT EPISODES OF UNIFIED AND DIVIDED GOVERNMENT SINCE 1928

Source: Wikipedia, AAFMAA Wealth Management & Trust LLC

Exhibit 3 shows the varying returns of each administration back to 1928, with red signifying a Republican Administration and blue signifying a Democratic Administration. Bold red or blue indicates that the president’s administration also controlled Congress.

EXHIBIT 3: EQUITY PERFORMANCE BY PRESIDENT AND CONGRESSIONAL SESSION

Returns for the Biden Administration through 9/27/2024.

Source: Bloomberg, Wikipedia, AAFMAA Wealth Management & Trust LLC

Finally, market dynamics are driven by many exogenous factors that are unrelated to or outside the control of the current Presidential administration, such as war and global geopolitical events, timing of recessions, and monetary policy. Thus, we believe it is difficult to conclude that equity market returns during each administration are tied exclusively — or even primarily — to the residing administration’s policies.

The Answer is to Stay Invested in the Market

The average annual performance of the S&P 500 has been positive under most administrations, either Democratic or Republican, perhaps largely due to the quality and efficiency of the US capital markets, the global strength of US business models, the relatively favorable US regulatory environment, and robust long-term US GDP growth. It seems likely that these factors have more influence on market performance than the party in power in the White House.

As shown in Exhibit 4, from January 1, 1928, to September 27, 2024, $1,000 invested in the S&P 500 returned more than 32,000% (excluding dividends) over the course of multiple Democratic and Republican presidential administrations. The return would be approximately 785,000% including dividends. Even taking into account that these results occurred over a period of close to 100 years, they are impressive. They correspond to annualized price and total returns of about 6.2% and 9.7%, respectively. Although equities have had periods of low or negative performance — for example, the price return from the beginning of 1928 to the end of 1953 was slightly less than zero — the arrow in the exhibit shows the long-term benefits of high average returns and compounding.

EXHIBIT 4: GROWTH OF $1,000 INVESTED IN THE SPX SINCE 1950

We believe that for investors with long horizon periods (say, five to 10 years or longer), this argues strongly for staying invested in the market rather than timing entrances and exits based on concerns that may seem critical in the moment but could be overshadowed by larger and unrelated structural, economic, and geopolitical influences. This includes investing according to beliefs about either political party.

US Candidate Policy Differences

Having said that, we do recognize that short-term returns can be influenced by perceptions of policy differences. In the current presidential campaign featuring Harris and Trump, differences exist primarily around trade, regulation, immigration, and taxation.

For those who would like to better understand these differences, we direct you to the Penn Wharton Budget Model’s Guide to the 2024 Presidential Candidates’ Policy Proposals which can be found at the following link https://budgetmodel.wharton.upenn.edu/2024-presidential-election.

Yours In Trust,

Paul

[1] Prior to 1957, the S&P 500 included fewer companies and was known as the Standard & Poor’s Composite Index. We looked at data going back to 1928 and, for simplicity, refer to the index as the S&P 500 over the entire period.

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© 2024 AAFMAA Wealth Management & Trust LLC. Information provided by AAFMAA Wealth Management & Trust LLC is not intended to be tax or legal advice. Nothing contained in this communication should be interpreted as such. We encourage you to seek guidance from your tax or legal advisor. Past performance does not guarantee future results. Investments are not FDIC or SIPC insured, are not deposits, nor are they insured by, issued by, or guaranteed by obligations of any government agency or any bank, and they involve risk including possible loss of principal. No information provided herein is intended as personal investment advice or financial recommendation and should not be interpreted as such. The information provided reflects the general views of AAFMAA Wealth Management and Trust LLC but may not reflect client recommendations, investment strategies, or performance. Current and future financial environments may not reflect those illustrated here. Views of AAFMAA Wealth Management & Trust LLC may change based on new information or considerations.