Articles on the link between Wall Street’s performance and the occupant of the White House are two-a-penny at the moment. You would think that traditionally business-friendly Republicans would be better for stocks, but a study by Infographics.com going back to 1925 showed that prices rose by an average of 9.5% a year under Democrats, compared to 2.2% under Republicans.
But are these studies significant or just statistical noise? As Buttonwood points out in The Economist, presidents are hardly all-powerful when it comes to economic policy. Not only do they often have to share power with a Congress dominated by the other party, but the Federal Reserve is also responsible for economic policy. Global events such as the 1973-1974 oil shock can thwart local policies. In short, “a coincidence of good and bad returns with presidencies of both parties is not proof of causation”.
“I don’t see any reliable pattern relating the market’s performance to which party is in the White House,” agrees Ed Yardeni of Yardeni Research. Bull and bear markets have happened under both presidents of both parties, as well as with majorities of either party in Congress. The president, then, is far less important to the market’s performance than all the column inches on the subject would suggest.
So why all the fuss? It’s human nature to look for patterns, which means that people are always identifying spurious correlations. Take the Super Bowl indicator. If this American football match, which takes place in January, is won by a team originally from a particular league, the stockmarket will rise that year. If a team from the other main league wins, the market will fall.
This indicator has an 80% accuracy rate, but of course correlation does not necessarily mean causation. A football match can hardly forecast stocks, says Floyd Norris in The New York Times. “But that doesn’t stop Wall Street from paying attention.”
As with other famous stockmarket statistics or indicators, ranging from presidents to hemlines (the notion that the length of women’s skirts indicates sentiment about the economy), it’s the underlying economic and financial situation, not the eye-catching correlation, that really matters.