In this clip from Motley Fool Answers, the cast welcomes Fool historian Matt Trogdon onto the show to talk about predictions for the presidential administration, specifically regarding their effect on stock market returns.
Unfortunately, looking at which presidents have presided over the best and worst periods for Wall Street gives us a much murkier picture than expected, but there is still a takeaway for investors.
A transcript follows the video.
This podcast was recorded on Nov. 8, 2016.
Alison Southwick: And what's the thinking about the market in general? The whole big market? Because I think I've heard it both ways. That the stock market goes up when Democrats are in office. Or maybe it's when Republicans are in office. I don't know.
Matt Trogdon: Sure. So our old friend, Morgan Housel, wrote a great story a few years back where he looked at presidents and stock market returns. So if you look at the top five returns under presidents, three of the top five presidents for the stock market have been Republicans [and] two have been Democrats. If you look at the bottom five, four of the bottom five presidents for the stock markets have been Republicans ...
Southwick: Oh, yeah.
Trogdon: ... and one of them a Democrat. So it's really a mixed picture, either way, and it's hard to come up with any discernible pattern. When you study history, like I did, one of the things you're always asking is, "Is there really a causation thing here?" So the top five presidents for stock market returns throughout U.S history [are] Calvin Coolidge, Gerald Ford, [and] Warren Harding. Those are your Republicans. Barack Obama and Bill Clinton. Those are your Democrats.
So you look at it, and both President Obama and President Clinton either came into office during a recession or right after one ...
Robert Brokamp: Right.
Trogdon: ... right? And both of them are leaving office not in a recession. So obviously it makes sense that the stock market returns are going to be pretty good for those guys. If you look on the other side, Woodrow Wilson was the Democrat who saw really bad stock market returns. George W. Bush was a Republican that saw really bad stock market returns. Woodrow Wilson was the president during World War I ...
Trogdon: ... and so that's significant.
Trogdon: George Bush came into office, I think, during a recession. Right at the end of the Clinton years and then left office during the worst recession since the Great Depression.
Brokamp: Right. He was bookended by two very bad economies.
Trogdon: Yeah, so to take those facts and then to say that Democrats do better for the market or Republicans do better for the market I think is really tenuous.
Brokamp: There are lots of studies about how presidential elections affect the stock market, both in terms of party. Both in terms of what if one party has all the levers of government or if it's a divided government. And even if there is a good pattern, it doesn't hold true consistently enough to make you money.
One, for example, is that the worst time for the stock market is the year after election. The first two years of a president's term generally are not as good as years three and four. Theory being as the election gets closer, various parts of the government do whatever it can to juice the economy to make things look good for the next election.
But if you had followed this advice and said, "OK, the first year of a president's term is the worst. I don't want to invest in the stock market," you would have missed the two best years of Obama's terms. So 2009 and 2013 were the best years to be investing in the stock market while Obama was president.