Presidential Politics and Stock Returns

In a provocative paper, Santa-Clara and Valkanov (2003) present evidence that stock market returns are much higher under Democratic presidents than Republican presidents. Their work was updated by Pastor and Veronesi (2017), who find that the effect is even stronger when the data are extended through the end of 2015. Given the strength of the results, Pastor and Veronesi go on to develop a model based on time varying risk aversion to explain the pattern. There is reason to suspect that the resulting linking stock market performance with presidential affiliation maybe spurious... In particular, two key events are responsible for much of the differential return under Democratic and Republican presidents. Specifically, the fact that Republicans were president during the two great crashes beginning in 1929 and 2008 and, not surprisingly, Democrats were president during the subsequent recoveries explains a majority of the differential. This suggests the finding may be serendipity. To study this possibility, we turn to international data for five major countries as out-of-sample test: Australia, Canada, Germany, France and the United Kingdom. Consistent with the suspicion that the U.S. results are spurious, we find no systematic relationship between the party in power and stock market returns.