Prediction: The stock market will rise regardless of who wins the 2024 election

The economy is shaping up to be one of the biggest issues in the presidential election. This is not surprising as Americans have endured the worst inflation cycle in 40 years following a surge in the money supply due to trillions in stimulus spending during the pandemic. A recent Motley Fool poll found that 60 percent of respondents ranked inflation as a top financial priority in the election.

The good news is that the real inflation rate is nearing the Federal Reserve’s 2 percent target, but prices remain high, especially in crucial sectors like housing, where the country faces an estimated 4.5 million housing shortage, according to the data. Zillowafter years of under construction.

The stock market is often seen as a key barometer for the economy. After all, major clues like S&P 500 (^GSPC 1.15%), Nasdaq Compositeand Dow Jones Industrial Average are reported every day by major news outlets. If a recession were to occur, for example, one of the first signs would likely be a falling stock market.

Of course, after several years of uncertainty, investors are wondering which candidate would be better for the economy and the stock market.

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Which political party is better for the stock market?

Based on historical averages, the stock market has performed better under Democratic presidents in modern history.

Since 1957, when the S&P 500 was created, the index has produced an average compound annual growth rate (CAGR) of 7.4%, excluding dividends. Under Democratic presidents, the index saw a CAGR of 9.8%, while the CAGR was just 6.0% under Republican presidents.

However, the average return under Republican presidents was actually higher, at 10.2 percent, compared to 8.9 percent under Democrats. Based on this data point, you could argue that the stock market has been stronger under Republican presidents.

Consideration of Congressional status produces a different set of results. A data set dating back to 1926, when the S&P had far fewer than 500 companies, found that returns under unified Republican and Democratic administrations, that is, when Congress was controlled by the same party as the president, were nearly identical.

During the 13 years that a Republican government controlled the White House and both houses of Congress, the average annual return of the S&P 500 was 14.5%. In the 36 years Washington has been under Democratic control, the index has returned 14.0%.

A divided Congress with a Democratic president has returned 16.6% over the 15 years it has run, while in the 34 years a Republican president has had a divided Congress, the S&P 500 has returned just 7.3%.

Does the president count for scholarship?

It’s important to remember that when looking at data like this, correlation does not equal causation. The relationship between which party runs the White House and stock market performance is weak.

For example, since 1957, the stock market had its best performance under President Bill Clinton, when the S&P 500 rose at a compound annual rate of 15.2%. The Clinton era benefited from the dot-com boom and the advent of the Internet, but he left office before most of those gains were wiped out when stocks tanked in 2001 and 2002. Had Clinton been in office for another year or two, its CAGR would have been much. worse.

The president has little direct control over the economy or the stock market, which makes it far different from areas such as foreign policy, environmental policy, and Supreme Court appointments. Plus, there’s a lot of randomness and cyclicality to consider.

While it is true that the president can influence economic policy and set the tone for the country, the US economy is dominated by the private sector. About 88% of US gross domestic product (GDP) comes from the private sector, and companies want to maximize profits no matter who is president.

The recent boom in the stock market, attributed to artificial intelligence (AI), has been driven by companies such as Nvidia and Microsoftand was triggered by OpenAI’s release of ChatGPT. Stocks have rallied since then, but crediting President Biden for those gains is a mistake.

Furthermore, the White House does not even control the primary economic levers that the federal government operates. For example, the Federal Reserve controls monetary policy through the federal funds rate and controls the money supply through the purchase and sale of securities.

Meanwhile, Congress controls fiscal policy, such as federal tax rates and the federal budget. The president can influence these institutions, but they do not have direct control over them.

Why the stock market will be bigger in four years

Right now, conditions look good for an extended bull market going into the next presidential administration. The Federal Reserve is expected to start cutting interest rates next month. Unemployment is still relatively low at 4.3% and inflation has finally cooled near the Fed’s 2% target.

Meanwhile, new AI technologies should continue to create the stock market through billions in investments and new products as companies push toward artificial general intelligence (AGI) and innovations like self-driving cars.

As important as the upcoming election is, it’s a mistake to base your investment decisions on who ends up in the White House — the connection isn’t as strong as it seems.

Right now, the stock market looks poised to keep rising for the next four years, regardless of who occupies the White House.