Are Democrats Bad for the Economy?

by | October 26, 2020

The United States’ exhausting election marathon is in its final sprint with only one week remaining before election day. Most polls, prediction markets and other indicators point to a Democrat ‘clean sweep’, with the party wresting back control of the White House and US Senate, while expanding on its majority in the House of Representatives.

A common misperception is that Democrats are bad for markets. Such fears find little foundation in fact. The longest sustained equity bull markets in the postwar period occurred during the Kennedy/Johnson years (1961-1969), as well as under presidents Clinton (1993-2001) and Obama (2009-2017). Selective memory of the difficult Carter years may be to blame. But so too is a willingness by many pundits to ignore the onset of high inflation under Nixon, the spectacular 1987 market crash under Reagan or the sweeping global financial crisis under George W. Bush. From 1946 until 2020, US S&P500 has averaged an annual gain of 10.8% under Democratic administrations versus 5.6% when Republicans were in charge.

Of course, correlation does not imply causation. And Democrats are frequently demonized for imposing high taxes, big government and excessive regulation, which are presumed detriments to growth, corporate earnings and equity market performance. But according to the Joint Economic Committee, average annual real GDP growth under Democratic presidents since the second world war averaged 3.9% against just 2.5% for Republicans (1945-2016). During the first three years of his term (i.e., pre-pandemic), President Trump has overseen the same pedestrian 2.5% rate of real GDP growth recorded by his post-war Republican predecessors.

According to economists Alan Blinder and Mark Watson:

 ‘The US economy has performed better when the President of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance.”

Blinder and Watson attribute that stronger performance partly to luck (fewer adverse oil shocks when Democrats sat in the White House), but potentially also to sounder policies (e.g., evidence of stronger total factor productivity growth).

Contrary to conventional thinking, Democratic administrations have also supported free trade over most of the postwar period, beginning with the Marshall Plan and the reconstruction of Europe and Japan and the formation of the General Agreement on Trade and Tariffs (Truman), the Kennedy Round (Johnson), the Tokyo Round (Carter), the signing of NAFTA (Clinton) and the negotiated entry of China to the WTO (Clinton). As Blinder and Watson note, US GDP growth under Democratic administrations benefitted from faster rates of global growth underpinned by expanding world trade.

As the 2020 campaign draws to a close, what can we infer today about market attitudes to the prospect of Democrats calling the shots in Washington, DC? Are investors jittery about higher corporate income and capital gains taxes and greater government regulation? Or are they looking forward to faster growth?

Attempts to answer those questions based on short-term market performance are, of course, imperfect. Other factors may be at work and caution should be exercised when drawing inference. Nevertheless, the recent performance of real interest rates, inflation expectations, cyclically sensitive sectors and styles and select emerging currencies strongly suggests that investors are warming to 2021 Democrat leadership in Washington, DC.

From their lows in early August—just before the Democratic National Convention—US long-term real interest rates have risen nearly 20 basis points, as have ‘breakeven’ rates of inflation, signs that investors expect nominal GDP growth to pick up. Notably, growth expectations are improving despite the political impasse over a second US fiscal stimulus package and in the face of accelerating Covid-19 infection rates in the US and Europe.

In all probability, therefore, investors anticipate significant policy stimulus following the elections, initiated by Democrats. After all, probabilities of a Biden win, based on polls of polls, have soared from 70% in early August to 87% at present. The odds of the Democrats becoming the majority party in the Senate have also risen.

Equity market ‘internals’ tell the same story. Over the past three months the best performing US styles have been small capitalization value and growth, which have outpaced more defensive strategies such as low volatility or high dividend stocks. Cyclical leadership is also visible, with industrials, consumer discretionary and information technology stocks trouncing energy and healthcare stocks over the past three months. Energy and healthcare are likely to face greater regulation if Democrats gain the upper hand in 2021.

Finally, select emerging currencies have benefitted from expectations of a ‘clean sweep’. The Mexican peso has appreciated nearly 7% against the dollar since August. The South Korean won and Chinese renminbi have also chalked up gains. The Russian ruble and Brazilian real, on the other hand, have languished. Investors appear to favor currencies of countries most likely to benefit from stronger global growth, falling trade frictions and renewed positive engagement with the US.

Of course, nothing is assured. As in 2016, the polls, pundits and markets could be wrong. The election results may be contested, perhaps even causing some form of constitutional crisis. The pandemic could trigger a double-dip global recession. But barring outcomes like these, it appears that investors are both expecting a ‘clean sweep’ in Washington and warming to the implications.

History suggests that’s probably a good idea.

Filed Under: Economics . Politics

About the Authors

Larry Hatheway

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets.

Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy.

Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland.

From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT.

At both GAM Investments and UBS Investment Bank Larry was widely recognised for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others.

Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

Alex Friedman

Alex Friedman is the co-founder of Jackson Hole Economics, LLC, a private research organization which provides commentary and analysis on economics, politics, the environment and finance, and develops actionable ideas for how sustainable growth can be achieved.

Friedman is a senior business leader with two decades of experience growing and transforming businesses in the financial and non-profit industry. He was the CEO of GAM Investments in London and chairman of the firm’s executive board. Previously, he was the Global Chief Investment Officer of UBS Wealth Management in Zurich, chairman of the UBS global investment committee, and a member of the executive board of the private bank.

Before moving to UBS, Alex Friedman served as the Chief Financial Officer of the Bill & Melinda Gates Foundation. He was a member of the foundation’s management committee, oversaw strategic planning, and managed a range of the day-to-day operating functions of the world’s largest philanthropic organization. Friedman also created the foundation’s program-related investments group, the largest impact investing philanthropic fund in the world. He started his career in corporate finance at Lazard.

Friedman served as a White House Fellow in the Clinton administration and as an assistant to the Secretary of Defense. He is a member of the Council on Foreign Relations and the Chairman of the Advisory Board of Project Syndicate, the non-profit opinion page that provides world-class commentary to over 500 newspapers globally. In addition, he is a board member of the American Alpine Club and the Jackson Hole Community Housing Trust, and has served on the boards of the Gates-Cambridge Trust, the Seattle Art Museum, and a number of other non-profits. 

Friedman is a regular contributor to several newspapers and thought leadership groups and has published numerous opinion editorials on topics including economics, finance, philanthropy, and politics in Project Syndicate, Bloomberg, The Wall Street Journal, The Financial Times, The Guardian, CNBC, The South China Morning Post, The Chronicle of Philanthropy, and other news outlets. He is also the author of Babu’s Bindi, and The Big Thing, both children’s book.

An avid mountaineer and rock climber for 30 years, Friedman has climbed some of the world’s highest mountains and led the first major climb to raise money for charity through an ascent of Mt. McKinley.

He holds a JD from Columbia Law School, where he was a Harlan Fiske Stone Scholar, an MBA from Columbia Business School, and a BA from Princeton University.

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