Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

Who Gets the Credit for the Bull Market in 1980?

The stock market rallied 32 percent in 1980 when Ronald Reagan was running for office. Was the gain in that period attributable to him or to Jimmy Carter? Did the market know Reagan would help engineer a big economic recovery? Or was it just happy Jimmy Carter would be in the rearview mirror? Or was the presidency largely irrelevant because interest rates were bound to go down anyway? Over some, or even most, periods, if the criteria are only nominal returns and who was president, the answer is likely to be the Democrats. In “The Presidential Puzzle: Political Cycles and the Stock Market,”¹ Pedro Santa Clara and Rossen Valkanov found that, from 1927 to 2003, the excess nominal stock market returns have been about 11 percent for Democratic presidents, but only 2 percent for Republican presidents. They also found that the smallest 10 percent of stocks did particularly well with Democratic presidents, earning a whopping 22 percent more in excess returns with Democratic presidents than with Republican presidents.

Based on my own work, looking first at just nominal returns, since 1926, and using the Standard & Poor's (S&P) 500 Index, Republican presidents have an arithmetic average return of 8.62 percent, while Democratic presidents have an average return of 14.92 percent. This assumes that that the returns attributable to, say, 1980 are properly attributable to the Democratic president in office. I think it is valid to challenge that ...