Without fail, every time a major election draws closer, the comparisons of Republican vs Democrat and which is best for the economy and stock market arise. No matter the political affiliation, the informed person knows (or at least conventional wisdom holds) that overall economic and market conditions have been best during the term of a Democratic president.
Truth and Myth on Presidential Influence Over Economy
It was during Bill Clinton's first presidential bid as a candidate that the phrase, "It's the economy, stupid," came into the mainstream of election year political mantra. As recession ensued in 1991, George Bush the elder lost popularity and the race for president in 1992. The truth is that it is folly to believe that a US president can influence the economy to the degree of significant control and selective timing. However, as foolish as the belief may be, a president's fate generally mirrors that of the state of the economy in the months leading up to election.
For example, no president has ever won re-election with an unemployment rate above 8%. Most voters, however, are somewhat reasonable. For example, the vast majority would agree that Ronald Reagan inherited 10.5% inflation from Jimmy Carter and that Barack Obama inherited the Great Recession from George W. Bush. But even following these so-called reasonable assumptions, is Carter solely to blame for high inflation and is Bush the only person to blame for the worst recession since the Great Depression? The short answer is No.
Similarly, should Obama receive credit for the incredible leap in stock prices during his first term? For example, let's say you have an IRA at Vanguard Investments and you invested $10,000 in the Vanguard 500 Index fund (VFINX) in March of 2009, just a few months after Obama was inaugurated. Today your $10,000 would be worth more than $20,000. Following the logic of most politicians, you would vote for Obama in 2012. Are you beginning to see that US presidents should neither receive blame, nor credit, for economic and stock market conditions?
Democrat Presidents Are Better For the Economy (But So What?)
A recent Bloomburg article says Democrats are better for the economy. It compares presidents from Harry Truman to Barack Obama (aka post World War II) using a wide range of economic indicators, including growth in gross domestic product (GDP), rate of unemployment, and increase in the Dow Jones Industrial Average. The results showed Harry Truman and John F Kennedy, both Democrats, in the top two respective positions, while George W Bush and Jimmy Carter were in the bottom two positions. Reagan and Obama were in the middle. On a point system, Democrats had the best record.
But how much of the economy is based solely upon the president's policies? Congress also has significant impact on policy that can affect the economy. Often a split government, such as Democrat President and Republican Congress is best for the economy and this kind of division or separation of powers is what can be best for the stock market. However, the health of the economy and direction of the stock market are cyclical and politicians, regardless of what they say or what voters believe, do not control them.
The bottom line is that a US president's fate and history's judgment, will continue to be tied to the state of the economy during their respective term; they can only hope that their timing is such that the economic cycle favors their re-election. This is not a cynical or hopeless opinion but rather a realistic statement based upon history and psychology.
It's the economy, stupid!