Is Romney or Obama Better for the US Economy? (Clue: Your Initial Answer Might Be Wrong)

President Obama can forget opinion polls; the most powerful person on the planet usually returns to office on how domestic stock markets performed in their first term – is he set to stay in the White House?

(August 29, 2012) — The current President of the United States looks set to retain his position, according to market research that signals risk-adjusted returns in domestic stock markets are highly correlated to the leader staying in office.

Despite the widely-held belief that Republicans preside over the most positive stock markets, CMC Markets have today shown Democratic presidents are in charge when the best risk-adjusted returns are produced.

 “Democrats have produced higher returns through lower risk, delivering higher risk-adjusted returns,” said Colin Cieszynski, a senior market analyst at CMC Markets, showing evidence that since 1900 US stock markets have performed better under Democratic presidents.

The analysis looked at the return made by markets taking into account the level of volatility on a yearly and monthly basis – this in turn evened out the distortion in the number of years each party had been in power.

On a monthly basis, and using Bloomberg data, CMC Markets found volatility was higher under Republican presidents – 5.5% vs 5.2% – but the returns were higher under Democratic leadership – 0.38% vs 0.73% even on a non-risk-adjusted basis. This also meant return to risk was twice as high under Democratic presidents – 0.07 vs 0.14.

“Over 112 years, Democratic presidents have outperformed their Republican counterparts,” said Cieszynski. Republicans were in power for 734 months and produced a total return of 332.09% – Democrats were in power for 617 months and produced 787.31%, he said.

“We then asked how the current administration stacks up, how President Obama been for the markets? And the answer, interestingly enough is ‘pretty good’. Dividing the returns for each president by the market volatility allows for some ‘apples-to-apples’ comparison of administrations,” said Cieszynski.

Presidents regarded by history to have been successful are found near the top of the risk-adjusted returns list, whereas the less successful ones are near the bottom, CMC Markets found, as markets are “a reflection of the psyche of the nation”.

“The current administration has been quite successful to date, compared with Republicans and other Democrats,” said Cieszynski.

President Obama is found fifth in the top risk-adjusted return table, behind Calvin Coolidge, Bill Clinton, Dwight Eisenhower and the first George Bush. The last three presidents are separated by just 0.03 points.

Herbert Hoover, the president during the 1920s market crash, is found at the bottom, just below Richard Nixon and the most recent President Bush.

“So what does this mean for President Obama’s re-election bid?” asked Cieszynski. “With the exception of the two President Bushes, presidents with stronger market performance have tended to be returned to office, while presidents with poor market performance tended to be removed from office. President Obama is in the upper half of the league table and is at a level that has usually favoured re-election, but as we have seen in the past: clearly anything can happen in politics.”

For more information on this topic from CMC Markets, click here (YouTube clip).