Stocks and the ‘presidential puzzle’

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.

5 thoughts on “Stocks and the ‘presidential puzzle’

  1. Professor Zagorsky,
    Hi, My name is Zack Bookbinder and I signed up for your macroeconomics class for this upcoming semester. Right now, I am on vacation with my parents and they are getting older (shh don’t tell them I said that) so they are asleep now and for that reason I just happened to click on this blog from the student link and have been curiously skimming through your findings/thoughts. The stock market happens to be one of the reasons I have chosen to major in economics and I am attempting to understand how it works for my own personal investments (small amounts of money I make working every summer). I had read similar articles indicating the stronger overall greater growth that the markets exhibit during democratic administrations but this latest market rally really makes no sense to me. First, the stock market reacted fairly negatively to the prospect of Donald Trump becoming the president, as most of the indexes took a dive right after he won the primary and even up until the general election. Why then, would the DJ and NASDAQ reach record heights even before the president elect enacts any legitimate policy all of a sudden? Although I understand it is impossible to fully predict the stock market, this discrepancy seems very odd to me. What do you think has caused investor sentiment and market tides to change over this period?

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