U.S. Economic History And How A Democrat Or A Republican Will Affect Your Portfolio
Your personal financial portfolio depends on you, not the president. As former First Lady Barbara Bush once put it, "Your success as a family... our success as a nation... depends not on what happens inside the White House, but on what happens inside your house.”
Only you have the power to chart your family's financial future. That said, presidents do influence economic policy, which in turn affects the stock market, and the market's performance helps determine your investments' value. With elections coming up in 2024, many investors are asking, "Are Republicans or Democrats better for the stock market?"
We would never presume to tell you how to vote, but in this article, we do want to explore how different parties have affected the stock market in the past and what influence they could have on your portfolio in the future.
U.S. Economic Performance: Republicans vs. Democrats
According to Gallup polls, public perception holds that Republican presidents are more likely to lead the nation into war but are also more likely to spearhead strong economic expansion. Democrats, on the other hand, are the party most likely to sue for peace while taking a softer approach to economic expansion.
In other words, if you want a secure, prosperous nation, vote Republican. Want a kinder, gentler nation? Vote Democrat. At least, that's the message the public perceives.
But do these stereotypes stand up to the data?
In a word, no. Historically, Democrat presidents are more likely to take Americans to war than Republicans and also more likely to preside over the White House during times of economic strength. Republicans are more likely to hold the presidency during times of both peace and slower economic expansion.
In the last century, the U.S. has experienced 17 recessions. Of these, 13 began under Republican presidents and four started while the Democrats were in office. But just because a Republican held the White House when a downturn began, does that mean they actually caused the recession? Did the Democrat presidents' policies drive growth or did they just oversee it?
Let's dig a little deeper.
What has the Economy been like Under Recent Presidents?
"The U.S. economy has performed better when the president of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance," wrote Alan Blinder and Mark Watson, two professors at Princeton University.
They have a point. Using raw numbers, the GDP, employment rates, stock market returns, and real wages all looked better under Kennedy, Carter, and Clinton than they did under Bush, W. Bush, or Trump.
Not so fast, says researcher Tim Kane of the Hoover Institute. Those numbers fail to account for economic lag. After all, Kennedy, a Democrat, inherited a strong economy from Eisenhower, a Republican. In his turn, Carter reaped benefits from Nixon/Ford, and Clinton rode on Reagan/Bush's coattails. If you account for lag, Kane says, neither Republicans nor Democrats can claim a win
James Pethokoukis of the American Enterprise Institute agrees. He published a paper entitled, "Obama Didn’t End the Great Recession That Bush Didn’t Cause." In that paper, Pethokoukis argues that economies cycle through peaks and troughs regardless of who is president or how much money they spend.
From 2017-2021, Republican president Donald Trump saw some of the finest economic numbers of any president followed by some of the most disastrous. Did Trump create those initial rosy figures? Or did he inherit a robust economy from Obama that got derailed by COVID and nothing was really Trump's to claim or blame?
How you answer that question may determine who wins your vote in 2024 — Democrat Joe Biden, former President Trump, or another Republican.
The 2024 Republicans' Economic Plans
By September 2023, nine major candidates had declared their intention to seek the GOP's presidential nomination. As of this writing, Donald Trump holds a commanding lead in the polls followed by Florida Gov. Rick DeSantis, tech entrepreneur Vivek Ramaswamy, and former South Carolina Gov. Nikki Haley. Each candidate offers their own unique economic plan.
Based on his prior presidency, Donald Trump can maybe be expected to deliver tax cuts for the upper middle class and corporations, extremely high deficits, a healthy jobs creation package, high tariffs, and strong entitlement programs — all served with some of that flamboyant populist rhetoric he can be known for.
Gov. Rick DeSantis has unveiled a ten-point economic plan focused on lower taxes, restrained federal spending, and welfare-to-work initiatives. DeSantis also says he wants to reposition higher education to help more graduates find work.
Entrepreneur Vivek Ramaswamy plans to cut many economic ties with China while strengthening the U.S. partnership with India, Israel, Chile, and Brazil. He says climate change policies have contributed to a softening of the trade-led economy.
A former accountant, South Carolina's Nikki Haley would lower taxes on gasoline, individual incomes, and small businesses. Her plan would also limit federal spending to a percentage of the overall economy, paying for federal infrastructure projects from general revenues.
All of the candidates are critical of President Biden's economic policies.
A Primer on Biden-omics
President Joe Biden has built an economic policy he calls "Biden-omics." This plan focuses on public investments, education for workers, and competition among entrepreneurs. He says the economy has added 13 million jobs under his presidency along with 10 million applications for small businesses.
Is Biden-omics working? That depends on whom you ask. His allies say it is a historic win while his detractors say it's a colossal disaster. Both sides can produce data to support their claims. As of September 2023, 66% of Americans say the president's economic project is a failure. That may or may not be his fault.
What Can a President Do About the Economy?
The president can introduce economic policies, appoint governors of the Federal Reserve, and launch programs to help Americans cope with downturns. For the most part, other economic moves are more about reelection than substantive change.
For example, in 2022, the White House sold the Strategic Petroleum Reserve (SPR) down to a 40-year low, hoping to reduce energy prices and improve their results in the midterms. Sure enough, energy and gas prices fell — and the Democrats outperformed expectations in the election — but Biden's team has been unable to refill the SPR. Now, Saudi Arabia and Russia have cut production, and energy prices are sky-high again.
A president's influence over the economy is hard to determine. It's even harder to figure out how they might influence your purchasing power or investment returns.
How the 2024 Election Could Impact Your Investment Portfolio
Elections always cause uncertainty. Whoever is elected will work hard to put in place the policies that got them their job, and that is bound to make investors feel jittery.
In his book, Stock Trader's Almanac 2022, Jeffrey Hirsch identified a cycle in which the first two years of a president's term usually see lower stock market returns and the last two years experience higher rates of return.
Some observers claim that returns are slightly higher when a president is reelected and slightly less when a new party takes power. Perhaps the Biden administration will follow this pattern or perhaps it won't. There's no way to tell.
What we can say about the markets is this:
Don't get too excited about disinflation. A period when the central bank tightens borrowing to slow price increases, disinflation is a welcome relief to periods of high inflation. However, the current disinflation levels are so small that interest rates will need to remain high for a long time to do much good. And that could cause its own harm.
Remember there are no good or bad markets. Invest regularly, and consider using an automated system to help you do it. If you’re a long-term investor, resist the temptation to track how your investments are doing every day. Your money needs time if it's going to work for you.
Don't try to time the market. Timing the market is almost always a terrible strategy nearly guaranteed to wipe you out. Work with a wealth management professional who can help you build a solidly performing investment strategy and stick with it.
Never panic. Losing your cool is not a good investment strategy. History and data is often a better guide than emotions.
Who's Really in Charge Here?
Ultimately, the president and their policies influence the U.S. economy — for better or for worse — and that's why it's good to be informed and vote for who you believe is the best choice. Better yet, involve God in that discussion; you'll likely find he has something to say to you.
As for your finances, it's generally a good idea to work with a financial advisor, invest in a well-diversified long-term strategy, and plan for your financial future with clarity and diligence. And again, involve God in that discussion. You — not the American president — are responsible for your retirement and your family's future.
Ultimately, we all have to trust in a power greater than ourselves, and it's not Trump, Biden, or another candidate. With a sense of both humility and responsibility, we can be smart investors, wise financial stewards, and good citizens.
If you would like to talk further about how the 2024 election may affect your investments, give us a call at Cooke Wealth Management. We'd love to talk with you.