Trump vs. Obama — who had the best 3rd year stock market gains?
As Donald J. Trump begins the fourth year of his presidency, it’s appropriate to ask: How has the stock market performed under his leadership as opposed to his predecessor, President Barack Obama?
I have no doubt this article will garner some strong disagreements — perhaps accompanied by colorful language — given our current political environment. But this is a data piece rather than a political opinion essay. (For the record, I am a registered Republican.) Of course, no single person, even the most powerful person on the planet, is responsible for the economy or the stock market. Presidents can influence them, however. One way of interpreting the stock market is as an election of sorts, as millions of investors vote on their beliefs for future cash flows of publicly-held companies.
Three years into Trump’s term, let’s revisit how stocks have fared amid Trump’s attempts to fulfill two campaign promises: “Make America great again” and “America first” in my third installment of comparing market performances.
A few words about methodology: To track performance during Trump’s first three years and Obama’s two terms, I used the total returns (with dividend reinvestment) of the Vanguard Total Stock Market Index Investor (VTSMX) and the Vanguard Total International Stock Market Investor (VGTSX). I selected the investor share class rather than the lower-cost ETF or admiral share classes because the latter did not exist for international stocks during the entire terms of the two administrations. For start dates, I used Obama's inauguration, Jan. 20, 2009, and Trump’s inauguration, Jan. 20, 2017.
U.S. stock market
Year three of Trump’s presidency saw stocks surge 25.8% versus only 4.3% for Obama’s third year as U.S. stocks ignored a hostile domestic political climate and trillion-dollar deficit. Clearly, investors voted overwhelmingly for corporate America.
For the full three-year period of Trump’s term, U.S. stocks gained a whopping 52.2% under the Trump administration. That translates to a 15.0% annual return.
By comparison, however, U.S. stocks soared 78.6% in the first three years of the Obama administration for a 21.3% annualized return. Both presidents bested the long-run historical return, but Trump made up half the shortfall from year two and has momentum going into year four.
When I point out that stocks soared under Obama, many people respond that stocks “had to” increase as he took over after a market plunge. This is pure hindsight. To illustrate, at the time, advisors as a whole believed just the opposite. Four thousand advisors in the TD Ameritrade platform allocated an average of 26% cash and bonds at the market high on Oct. 9, 2007, and nearly doubled that to 51% on March 9, 2009, when the market bottomed. Advisors timed markets poorly.
U.S. stocks climbed steadily through most of Trump’s first two years. Though stocks stumbled in the fourth quarter of 2018, they recovered quickly. Overall, volatility was a bit less under Trump than under Obama. Yet the market, as a forward-looking measure of corporate America, still did significantly better under Obama for the first three years.
U.S. stocks vs. international stocks
It turns out that the U.S. stocks bested international stocks under both presidents’ first three years in office.
International stocks gained only 30.6% during the first three years of the Trump administration. That lagged the U.S. performance by 21.6 percentage points. By comparison, under Obama, U.S. stocks bested international stocks by a slightly lower 18.0 percentage points. As of the end of year three, Trump slightly bested Obama with his “America first” campaign promise when it came to corporate America.
What will year four bring?
While no one can predict the market under year four of Trump, we do know how stocks performed in year four of Obama U.S. stocks gained 15.7%, outpacing international by a mere 1.2 percentage points.
To best Obama on total return for U.S. stocks, Trump would need a 35.7% return for year four. Though unlikely, it’s certainly not beyond the realm of possibility. But for Trump to outperform international stocks by less than Obama, he would have to have a shortfall of about 2.4 percentage points.
The only way a full eight-year comparison can be run is, obviously, if Trump is re-elected. Under Obama’s first term, U.S. stocks gained 106.6% and slowed to 64.3% in the second term. The second-term returns were still above historical averages but the lower returns will be easier for Trump to best. Under Obama’s second term, U.S. stocks trounced international by 53.7 percentage points, versus 22.8 percentage points for the first term.
It bears repeating here that there are key elements beyond either president’s control and that it is far too simplistic to assign credit or blame for stock market performance to any one person — even the president. Yet over longer periods of time, the data does make a compelling partisan distinction. U.S. stocks have fared far better under Democrats, Forbes reports. From March 4, 1929 through July 5, 2016, U.S. stocks returned an average of 1.71% under Republican administrations and 10.83% under Democratic administrations. While an updated analysis would have the gap narrowing, it would still be significant.
“The excess return in the stock market is higher under Democratic than Republican presidencies,” according to a paper, “The Presidential Puzzle: Political Cycles and the Stock Market,” by Pedro Santa-Clara and Rossen Valkano in the October 2003 Journal of Finance. The paper also states “there is no difference in the riskiness of the stock market across presidencies that could justify a risk premium.”
And higher stock performance under a Democratic presidency is likely to persist going forward, according to an October 2018 working paper in for the National Bureau of Economic Research entitled “Political Cycles and Stock Returns,” by Lubos Pastor and Pietro Veronisi. The model, built to predict stock market returns, “predicts higher average stock market returns under Democratic presidencies, explaining the well-known ‘presidential puzzle.’” (Pastor and Veronesi, both from the University of Chicago’s Booth School of Business, say their model can also explain why economic growth has been faster under Democratic presidencies.)
I’ve seen people make costly bets against America because they didn’t like Obama. And I’ve seen the same thing with people who didn’t like Trump. Both thought they knew something other investors didn’t know. The truth is, the economy and stock market has thrived under both presidents.
Even if there were statistically significant data showing markets would perform better under a particular party, I wouldn’t recommend clients invest that way going forward. Once data is discovered and made public, it tends to no longer work.
I’m happy to say that I think capitalism is stronger than even dysfunctional politics and doesn’t belong to any one candidate or political party.
Thus, I won’t be making a single change in asset allocation before or after the November election.