Len Boselovic’s Heard off the Street: Democrats trump GOP on economy, Wall Street
March 21, 2016 12:00 AM
Economists have been measuring economic growth during every four-year presidential term since Democrat Harry Truman.
One market wag warned CNBC last week that the stock market will fall 50 percent if Donald Trump is elected president.
History indicates the chance of one person, even if that person is Herr Drumpf, wreaking so much havoc on Wall Street are small. But history does tell us a few things about the performance of the stock market and the economy under Republican and Democratic presidents, phenomena that, like Mr. Trump, can’t be ignored even if they can’t be completely explained.
“There is a systematic and large gap between the U.S. economy’s macroeconomic performance when a Democrat is president of the United States versus when a Republican is,” Princeton University economists Alan Blinder and Mark Watson, concluded in a 2014 paper for the National Bureau of Economic Research.
Measuring economic growth during every four-year presidential term since Democrat Harry Truman, the economists found that the gross domestic product grew an average of 4.35 percent during Democratic administrations and only 2.54 percent during Republican administrations. Over four years, that translates into growth of 18.6 percent under a Democratic White House and 10.6 percent during Republican administrations, the economists said.
They found that Democratic presidents do much better than Republican ones when it comes to creating jobs, lowering the unemployment rate, and generating corporate earnings and stock market returns. In some cases, the gap is so large ”that it strains credulity” given how little credit most economists give the president for influencing the economy, they said.
However, Mr. Blinder and Mr. Watson said their data indicates that good luck, such as fewer spikes in oil prices and more favorable international conditions, along with “a touch of good policy” explain only a little more than half of the economy’s superior performance under Democrats.
“The rest remains, for now, a mystery,” they wrote.
Could some of the GOP deficit be blamed on Republicans having an incredibly poor sense of timing?
“A lot of this had to do with the timing of economic cycles,” said John Frankola of Vista Investment Management in Pittsburgh, noting that Democratic presidents Bill Clinton and Barack Obama took office at low points in the economic cycle when that there was nowhere for the economy to go but up.
Colin Symons of Symons Capital Management in Mt. Lebanon agrees.
“The Republican/Democrat history is largely happenstance,” he said in an email. “The more important thing is that whoever wins is inheriting an economy that is slowing and perhaps facing real trouble.”
Mr. Frankola cautioned investors not to put too much faith in prognosticators who think they know how the market will react to the outcome of the presidential election. He said they were horribly wrong about the impact Mr. Obama would have on health care stocks. Mr. Frankola said Vanguard’s Healthcare Index ETF, whose top holdings include United Health, Aetna and Anthem, generated annualized returns of 16 percent during the Obama administration vs. 13 percent for the S&P 500.
No matter what market pundits have to say about the outcome of the 2016 election, “there’s a good chance that the consensus is going to be wrong again,” Mr. Frankola said.
Malcolm Polley of Stewart Capital Advisors in Indiana, Pa., said Democrat Hillary Clinton and Ohio Republican Gov. John Kasich would have the least negative impact on the market. He said the campaign is being waged during what is currently the third-longest bull market and fifth-longest economic recovery since 1900.
“The economic recovery is long in the tooth. At some point, we’re going to have a recession,” he said.
Mr. Frankola agrees, but doesn’t see a recession or bear market on the immediate horizon. His reason: the economy and Wall Street are exhibiting little of the froth that typically foreshadows either calamity. The stock market is reasonably priced based on corporate earnings and economic growth is less than spectacular, Mr. Frankola said.
Mr. Symons, however, isn’t reassured.
“I’d wonder out loud if whoever wins will be a one-term president, not necessarily through their fault, but just because they seem to be inheriting a real mess,” he said.
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