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Why does Wall Street fear a Democrat in the White House? The data just doesn’t add up

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In just about every presidential election cycle, Wall Street goes through a series of contortions to debate which scenario is better for your stock portfolio: A Republican in the White House? Or a Democrat?

The consensus is almost always the same: the Grand Old Party.

Sure enough, when Donald Trump won in November 2016, investors greeted it as a risk-on event. Stocks soared on the hopes (eventually realized) of a cut to the corporate tax rate and looser regulation. The dollar and interest rates climbed too, on the assumption (never realized) of a boost to infrastructure spending. The rally became known as the “Trump Trade.”

With four months to go before Election Day, a majority of pollsters, betting sites, and a chorus of Wall Street honchos are now forecasting that Washington, D.C., will be awash in blue come January.

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But the script sounds a bit different this time around. Nobody’s really freaking out about the prospect of a Joe Biden presidency as the odds improve in his favor. JPMorgan says it might even be good for stocks. UBS concurs.

Yes, a Democrat in the White House is more likely to result in a hike of the corporate tax rate and tighter regulatory oversight of health care, finance, and energy sectors, but that’s no reason to bail on these stocks, the analysts say.

Besides, history doesn’t bear out the theory that the Democrats are bad for business, or for stocks.

Going back to President William McKinley (a Republican, for those keeping score), the blue-chip Dow Jones industrial average has typically performed better in the years when a Democrat holds the presidency. According to LPL Research, blue chips had their best run in the Roaring Twenties under Calvin Coolidge (Republican), but the next three top performers, on a total return basis, were Democrats: Bill Clinton, Franklin Roosevelt, and Barack Obama. The Dow’s performance under Trump is 30.3%, worse than the George H.W. Bush years, but better than the Gerald Ford presidency. The worst years for Dow stocks were during the presidencies of Republicans Herbert Hoover, George W. Bush, and Richard Nixon.

Source: LPL Research.

Now let’s take a look at GDP. A reminder: Stock market performance is not to be confused ever with economic growth. (Exhibit A: the current bull market run during the worst recession in anybody’s memory).

And here, with GDP, Democrat Presidents have historically done a better job delivering on their promise to grow the economy, which usually bodes well for the benchmark S&P 500. This table via LPL Research breaks out the track record of Democrats vs. Republicans going back to 1950. A Democrat in the White House and a Democrat Congress has, on average, grown the economy 4% per annum.

Source: LPL Research

According to a growing number of markets pundits, the best scenario of all is a divided Washington, with one party holding the executive branch and the opposition (or a split) holding the legislative.

And if you go back to the history books, it would be a power scenario in which there was a Democratic President and the Republicans holding at least one chamber of Congress. For stocks, the best power-sharing scenario of modern times is Republicans with a lock on Congress and a Democrat in the White House. Going back to 1950, the average annual return on the S&P 500 under such a scenario—Democrat President + Republican-controlled Congress—has been 18.3% since 1950 (see chart).

If you’re a buy-and-hold investor, you shouldn’t fear a Biden presidency. But you’d be justified in hoping the Blue Wave never materializes.

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