How do US presidential elections affect the economy and the stock market?
Why Read This
What Makes This Article Worth Your Time
Summary
What This Article Is About
As the US presidential election approaches, financial markets worldwide watch nervously. Counter to conventional wisdom that positions Republicans as the business-friendly party, historical analysis reveals a striking pattern: between 1927 and 2015, the US economy and stock markets consistently performed better under Democratic presidencies. Research by Lubos Pastor and Pietro Veronesi from the University of Chicago found average GDP growth of 4.86% under Democrats versus 1.7% under Republicans, while the equity risk premium—the excess return above risk-free rates—was 10.9% higher under Democratic leadership.
This pattern extends globally, affecting markets in Australia, the United Kingdom, Canada, France, and Germany, where equity returns were similarly elevated during Democratic US presidencies. The researchers propose this reflects cyclical voter risk aversion: economic weakness drives voters toward Democrats’ wealth redistribution policies, and subsequent recoveries boost stock prices. However, the upcoming election presents different circumstances—a continuation rather than transition, occurring during economic strength—suggesting historical patterns may not repeat, particularly as prediction markets and fund manager preferences add additional complexity to market reactions.
Key Points
Main Takeaways
Democrats Outperform Economically
Historical data from 1927-2015 shows US GDP growth averaged 4.86% under Democratic presidents versus only 1.7% under Republicans.
Higher Equity Risk Premiums
Stock market equity risk premiums were 10.9% higher under Democrats, reaching 17.4% in the 1999-2015 period alone.
Risk Aversion Timing Theory
Economic crises increase voter risk aversion, leading to Democratic victories followed by recovery-driven stock price increases during their terms.
Global Market Correlation
Australian stocks showed 11.3% higher equity risk premiums under US Democratic presidencies, with similar patterns in UK, Canada, France, and Germany.
Strong US Economic Performance
The US economy added 254,000 jobs in September 2024 and grew at 3% annualized pace, exceeding the decade’s sub-2% average.
Surprise Republican Wins Boost Markets
Unexpected Republican victories correlate with 2-3% higher short-term returns, potentially reflecting fund managers’ political preferences influencing immediate market reactions.
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Article Analysis
Breaking Down the Elements
Main Idea
Counter-Intuitive Economic Performance
The article challenges conventional political stereotypes by demonstrating that Democratic presidencies have historically delivered superior economic and stock market performance despite Republicans’ business-friendly reputation. This paradox matters because it reveals how voter psychology and economic cycles interact to produce outcomes that contradict prevailing assumptions about party platforms and their economic consequences.
Purpose
Inform and Contextualize
The author aims to provide investors and voters with data-driven insights as the election approaches, moving beyond partisan rhetoric to examine empirical patterns. By presenting rigorous academic research alongside current economic indicators, the piece helps readers understand market dynamics while tempering expectations that historical patterns will necessarily repeat under different economic conditions.
Structure
Data Presentation → Theoretical Explanation → Current Application
The article opens with current election anxiety before presenting surprising historical data, then explores theoretical explanations for the pattern, extends analysis to global markets, and concludes by applying these insights to the present situation while noting important caveats that distinguish this election from historical precedents.
Tone
Analytical, Measured & Evidence-Based
The writing maintains scholarly objectivity while remaining accessible, carefully distinguishing correlation from causation and acknowledging uncertainty. The tone balances data-driven confidence in presenting historical patterns with appropriate humility about predicting future outcomes, reflecting both academic rigor and practical awareness of markets’ complexity.
Key Terms
Vocabulary from the Article
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Tough Words
Challenging Vocabulary
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Acting in anticipation of future problems or needs rather than just reacting to events after they occur.
“Democrats are often seen as the party of proactive government spending, favouring policies that redistribute wealth through taxation.”
The background context or circumstances against which events unfold, providing important situational framework for understanding current developments.
“All of this stands against the backdrop of simmering tensions with China and an ongoing crisis in the Middle East.”
To protect against financial loss or risk by making counterbalancing investments that offset potential negative outcomes.
“The price of gold – a common way for investors to hedge against uncertainty – has soared to record heights.”
Unwilling to take risks, preferring safer options with more certain outcomes even if they offer lower potential returns.
“When the economy is weak and stock prices are low, voters are more risk-averse.”
To introduce, mark the beginning of, or cause something new to happen or arrive, often suggesting ceremonial significance.
“Will a win by the Democrats in November usher in a stock market boom?”
The process or period of changing from one state, condition, or party to another, involving significant shifts in policy or leadership.
“The last three transitions from Republican to Democratic presidencies support this theory.”
Reading Comprehension
Test Your Understanding
5 questions covering different RC question types
1According to the article, Republicans have historically delivered better stock market performance than Democrats.
2What is the equity risk premium?
3Which sentence best supports Pastor and Veronesi’s theory about why Democrats are elected during economic downturns?
4Evaluate each statement about the global effects of US presidential elections:
Australian stock equity risk premiums were higher under Democratic US presidencies.
Stock returns in Australia and the US show high correlation, especially in election years.
The correlation between US and Australian markets proves US elections directly cause Australian stock movements.
Select True or False for all three statements, then click “Check Answers”
5Based on the article, why is the upcoming US election unlikely to produce the historical stock market boom associated with Democratic victories?
FAQ
Frequently Asked Questions
Their University of Chicago research examined 1927-2015 data and found that US GDP growth averaged 4.86% under Democratic presidents versus 1.7% under Republicans, while equity risk premiums were 10.9% higher under Democrats. This challenges conventional assumptions about which party delivers superior economic performance.
The effects extend internationally through highly integrated financial markets and trade relationships. Australian stocks showed 11.3% higher equity risk premiums under US Democratic presidencies, while similar patterns appeared in the UK (7.3%), Canada, France, and Germany (all around 13%). Global ownership of stocks and synchronized economic cycles amplify these cross-border impacts.
The researchers propose that the pattern reflects timing and voter psychology rather than policy superiority. Democrats tend to win when economic crises make voters more risk-averse and receptive to wealth redistribution. As economies recover during Democratic terms, voters’ risk tolerance returns, potentially leading them back to Republican candidates. The cycle continues based on economic conditions rather than reward for performance.
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This article is rated Advanced due to its sophisticated economic and statistical concepts, including equity risk premiums, correlation versus causation, and complex political-economic theories. It requires strong analytical skills to navigate technical financial terminology while understanding nuanced arguments about voter behavior and market psychology. The multiple layers of evidence and theoretical explanation demand careful, methodical reading.
Unlike previous Democratic victories that occurred during economic crises (1990-91 recession, 2008 financial crisis, COVID-19 pandemic), the current election would represent a continuation of Democratic leadership during strong economic performance. The US economy added 254,000 jobs in September 2024 and grew at 3% annualized pace, circumstances that don’t match the crisis-recovery pattern underlying historical stock market booms.
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