The best predictor of anything, is when money is on the line. Money changes everything and when it is at stake, people generally become more measured and practical in their decision making. There is no doubt that betting odds have consistently been the best predictors of pretty much everything.
Money in markets are no exception. Markets are not perfect and require a tremendous amount of speculation about the future. The stock and bond markets are all about the future. If they react to something that happens now, it is because the future outlook is affected.
Money is so pervasive in changing points of view that studies have shown that adamant science deniers will actually soften, if not somewhat change, their stance when money is on the line. Climate change can be considered eminent just based on corporate spending. From insurance companies changing their actuary standards to account for increasingly violent storm activity to the massive price increases in Canadian farmland, due to an anticipated longer growing season, money is the best predictor.
In election years, markets will shift their focus based on which presidential candidate is currently the front runner. What the money actually says is a very different picture than what is painted by the political right.
When a Republican is the front runner, bonds increase in price. Why? The expectation is for the federal deficit to increase at a more rapid rate and thus raise government borrowing costs. This is not without past validation. The federal deficit has increased the most in percentage of GDP under recent Republican presidents and declined as a percent of GDP under Democrats. Yes, many Republicans decry the size of the current federal debt under President Obama but with an unwillingness to acknowledge that an empty chair could have created most of it after W. presidency. Tax cuts for the wealthy, two stimulus packages, that went mostly unspent, two wars costing trillions of dollars, the addition of Medicare Part D and a massive recession, that dramatically reduced tax rolls, certainly rolled over into the Presidency of Barack Obama.
How much have deficits increased under Republicans versus Democrats? The first President to increase federal deficits in the last 45 years was Nixon with an increase of close to 5%. Reagan was a 55% increase, H.W. Bush accounted for 18% and George W. increased deficits 35%. On the contrary, Carter reduced spending as a percent of GDP by 5%, Clinton by a little over 30% and it has increased about 23% under Barack Obama, much due to the factors previously mentioned, but has started to fall toward the end of his term at a rate that is without precedent.
How have presidents fared in overall debt increases? Reagan 189%, George H. W. Bush 55%, Bill Clinton 37%, George W. Bush 86% and Barack Obama 35%.
Deficits have nowhere to go but up currently and most likely the next President will see increases regardless of their party. The question is always how much?
As far as which party is best for stocks, it is no questions. Democrats have presided over the best stock market gains by far. Again, much of the performance of one president can reflect the prior president. President Obama has presided over great gains, but it is also important to remember that the market had to rebounded after such dramatic losses before February 2009.
Average annualized returns under Republicans since 1901 are 3%. Under Democrats they are 7%. How about since Kennedy, to get a more recent picture? Democrats again lead with 7.92% and Republicans show 4.64%.
The zenruption view is that a recession is certainly due. The next President, whether Clinton of Trump, will certainly deal with a downturn and a loss in stock market returns. The response is what will matter.
The picture has traditionally been painted of “tax and spend” Democrats and “the party of fiscal responsibility” Republicans. These designations aren’t necessarily true. Much of the blame rests with the pursuit of trickle-down economics as a steadfast policy that has never worked. Even the economic gains under Reagan have shown to be mostly correlated to Paul Volker reducing interest rates, after dramatically increasing them, while he was chairman of the Federal Reserve.
zenruption feels strongly that no President sits in a vacuum during their term and that the policies of the preceding President certainly effects the subsequent. Regardless, an 8-year term can bring about substantial change and there is certainly a reason that stocks prefer Democrats and bonds prefer Republicans.
Lina Martinez is a contributor to zenruption’s money, business, life and politics sections. She still has not disavowed her propensity to sing Careless Whisper in the shower. She has recently discovered blackberry mojitos and is really happy about it.
Feature photo courtesy of Flickr, under Creative Commons Attribution-Noncommercial license