Research into a phenomenon known as the “presidential puzzle” has shown that the stock market performs better under Democrats than Republican presidents. Does that mean it’s time to sell all of your investments now that Donald Trump has won?
This reaction by the stock market is puzzling since Republicans are typically viewed as more business friendly than Democrats. Republican candidates typically call for lower taxes and less regulation, which should be great news for corporate bottom lines and their shareholders.
How much is the difference? Since 1900, the Dow Jones Industrial Average has gone up about 3 percent in the average year under a Republican President and about 7 percent a year under a Democratic one. Money growing at 3 percent a year doubles in roughly 23 years, while money growing at 7 percent doubles in roughly 10 years, a sizable difference.
What explains the puzzle? Numerous researchers have suggested differences such as higher inflation, greater rewards for taking risks and increased government spending under Democratic presidents among many factors as the answer.
In other words, many of the answers implicitly assume that Democratic presidents spend more than Republicans, which boosts the economy. Nevertheless, research published a few months ago suggests there will be probably never be agreement on the cause because “the presidential puzzle remains a popular and recurring subject of discussion … and any conclusion on this topic will undoubtedly bring out a flurry of passionate political reactions.”
Regardless of the right explanation, if one even exists, followers of the presidential puzzle believe now is a good time to sell. As for me, I will be waiting until the next administration starts offering concrete proposals before making any major new financial decisions.