New research by Research Affiliates questions whether a Democratic presidency is really better for stock market returns.
The fact that the U.S. market has performed better under Democratic administrations isn’t disputed. Researchers have documented a statistically significant outperformance when a Democrat is in office going back to the 1920s.
The phenomenon is unexplained, and is known as the “presidential puzzle” by researchers.
But in a study published last week, Research Affiliates chalks it up to a statistical fluke. Two Republican presidents, Herbert Hoover and George W. Bush, held office in 1929 and 2008 when the two worst economic calamities of the last 100 years occurred.

Both these presidents were succeeded by Democrats, Franklin Roosevelt and Barack Obama, each of whom entered office when equity prices were exceedingly cheap. Research Affiliates does say it, but some believe it was just a coincidence that both the Great Depression and the Great Recession occurred after a period of prolonged GOP control of the White House.
The well-regarded research firm looked at whether a similar pattern held in other countries, specifically, whether markets do better when more liberal/leftist leaders hold power compared to their conservative/rightist counterparts.
The paper, “Presidential Politics and Stock Returns,” found that in Australia, Canada, France, the U.K. and Germany, the average market returns when the leftist party was in power versus when the rightist party was in power were mixed.
“Outside the United States, we find no systematic relationship between the party in power and stock market returns,” say the researchers, Rob Arnott, chairman of Research Affiliates; Bradford Cornell, professor of finance at the California Institute of Technology; and Vitali Kalesnik, head of equity research at Research Affiliates.
The Research Affiliates’ study doesn’t disprove the impact of politics on the U.S. market, according to Pietro Veronesi at the University of Chicago Booth School of Business. Veronesi, with his colleague Lubos Pastor, have posited that investors demand higher equity risk premiums in the U.S. under Democratic presidents, due in part to expectations of higher tax rates.
Veronesi and Pastor found that from 1925 to 2015, Democratic administrations outperformed by nearly 11 percentage points on average. Their working paper, “Political Cycles and Stock Returns,” was updated in March 2017.
Research Affiliates doesn’t test “whether taxes rise under what they call left-wing governments and fall under what they call right-wing governments,” Veronesi said in an email.
And what constitutes a leftist or rightist government outside the U.S. isn’t so easy, he adds.
“It is in fact difficult to find a clean two-party system outside the U.S. In most countries, there are more than two strong parties (e.g., in the UK, you have not only Conservatives and Labor but also Liberals, UKIP, etc.),” Veronesi said. “Those parties often form coalitions that complicate the definition of left-wing versus right-wing governments.”
Arnott and his colleagues recognized the challenge in making cross-country political comparisons. The Research Affiliates study also argues that two key events—the 1929 and 2008 financial crises—appear to account for much of the difference in returns.

“Unsurprisingly, a Democrat held the office of president during the immense subsequent recoveries,” the study says.
But that’s exactly the point, Veronesi said. “We argue that people are more likely to elect Democrats during crises” when risk aversion runs high. “You cannot simply discard the two biggest crises and look at the rest.”