Republican or Democrat? - S&P 500 Performance Analysis

Republican or Democrat? - S&P 500 Performance Analysis

Written by: Manuel Ritsch

With only six days until the election results, market participants are closely analysing how a shift in leadership could influence the trajectory of financial markets. In this analysis, we examine the performance of the S&P 500 since 1960 under Republican and Democrat presidencies.

Democrat Performance:

The line chart above illustrates the varying return trajectories of the S&P 500 across different Democrat presidencies. Notably, each Democrat administration has yielded positive cumulative returns, with overall performance ranging between 25% and 120%.

As seen in the table above, the average annualized return during democrat presidencies is 9.64% with an average standard deviation of 13.62%. Assuming a risk-free rate of 2.2% we get an average Sharpe ratio of 0.58, which means that for every unit of risk investors assume, they are rewarded with 0.58% excess return.

The table above presents drawdown statistics, which measure the peak-to-trough declines in the S&P 500 during Democrat presidencies, reflecting periods of market losses and the time required for recovery. On average, the maximum drawdown experienced is -22.43%, with an average recovery period of 367 days. Typically, investors face more frequent, smaller drawdowns; in fact, 50% of the time, the average drawdown is a modest -0.7%, with an average recovery time of 4 days.

Republican Performance:

The line chart above illustrates the diverse return paths of the S&P 500 under various Republican presidencies. Unlike Democrat presidencies, some Republican administrations have resulted in negative cumulative returns for the S&P 500, with performance ranging from -35% to 85%.

As observed in the table above, the average annualized return during Republican presidencies is 5.68%, accompanied by an average standard deviation of 16.8%. Historically, Republican administrations have delivered not only lower returns but also higher volatility. With a risk-free rate of 2.2%, this results in an average Sharpe ratio of 0.25, indicating that for every unit of risk taken, investors are rewarded with a 0.25% excess return. This is 0.28% lower than the Sharpe ratio observed during Democrat presidencies, underscoring the comparatively lower risk-adjusted returns seen under Republican leadership.

The data indicates that the average maximum drawdown during Republican presidencies is notably larger at -32.83%, compared to -22.43% under Democrat administrations. Additionally, two Republican presidents concluded their terms with the stock market still in a drawdown phase. On average, it took the market 400 days to recover from these maximum drawdowns—34 days longer than the recovery period observed during Democrat presidencies. The median average drawdown also reflects greater downside, with a typical decline of -0.92% under Republican leadership compared to -0.7% under Democrats.

Conclusion:

Historical performance indeed suggests that stock markets tend to perform better on both an absolute return basis and a risk-adjusted basis under Democrat presidencies. The higher volatility observed during Republican presidencies may indicate increased policy uncertainty, potentially impacting investor confidence. However, it’s essential to acknowledge that numerous external factors, such as monetary policy, economic cycles, and global events, also play significant roles in shaping market performance and are often beyond the direct control of any administration. These third-party factors add layers of complexity to attributing market outcomes solely to the political party in power, and should be taken into account.

Disclaimer:

Past performance does not guarantee future results, which may vary. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Copyright Alpha Rho Technologies LLC. All rights reserved.