Trump vs. Obama: Who had best 2-year stock market gains?

At the midpoint of Trump’s presidency, how has the stock market performed? Why is it important? Because one way of interpreting the stock market is as an election of sorts, as millions of investors vote on their beliefs of future cash flows of publicly held companies. As a Wall Street Journal editorial pointed out in December, “The president has a right to believe in market signals. More than any individual can do, markets absorb material events occurring in the world and make financial bets on the future.”

After two years of the Trump presidency, let’s see how the market fared amid his attempts to fulfill two campaign promises: “Make America great again” and “America first.” This is a follow-on to a piece I wrote last year, about how the stock market performed in the first year of Donald Trump’s presidency and compared it to the first year of Barack Obama’s presidency, as well as to the long-term performance of markets.

To analyze both initiatives, I rely on the Credit Suisse Global Investment Returns Yearbook 2017, compiled by Elroy Dimson, Paul Marsh and Mike Staunton, which provides 117 years of stock market returns. For MAGA, I’m curious how U.S. stocks performed relative to the 9.5% annual average since 1900, and for his “America First” proposal, I ask how U.S. stocks performed against international stocks.

To track performance during Trump’s first two years and Obama’s two terms, I used the total returns (with dividend reinvestment) of the Vanguard Total Stock Market Index Investor (VTSMX) and the Vanguard Total International Stock Market Investor (VGTSX)

I selected the investor share class rather than the lower-cost ETF or Admiral share classes because the latter did not exist for international stocks during the entire term of the two administrations.

For start dates, I used the Obama’s inauguration date of Jan. 20, 2009, and Trump’s inauguration date of Jan. 20, 2017.

The U.S. Stock Market
U.S. stocks gained 21% for the first two years of the Trump administration. That translates to a 10% annual return, which is 0.5 percentage points above the long-run average. By comparison, U.S. stocks gained 71.2% in the first two years of the Obama administration, and the 30.8% annualized return bested the historical average by 21.3 percentage points.

When I point out that stocks soared under Obama, many people respond that stocks had to increase as he took over after a market plunge. Well, if that is true, advisors certainly didn’t know it — and appear to have believed just the opposite. Four thousand advisors in the TD Ameritrade platform allocated an average of 26% cash and bonds at the market high on Oct. 9, 2007, and nearly doubled that to 51% on March 9, 2009, when the market bottomed. Advisors timed markets poorly.

U.S. stocks climbed steadily through most of Trump’s first two years, and Trump regularly took credit. But stocks stumbled in the fourth quarter of 2018, amid uncertainties about international trade issues, a government shutdown and the mushrooming debt brought on by tax cuts without spending cuts. In the first 20 days of January, U.S. stocks recovered a large portion of those Q4 2018 losses.

It seems Trump takes no responsibility for stock market performance when share prices fall. As that same Wall Street Journal editorial noted, “No logic exists that will allow Mr. Trump to take responsibility only for sunny days.”

U.S. Stocks vs International Stocks
U.S. stocks gained 21% in the first two years of the Trump administration. That bested international stocks by 9.2% or 4.5 percentage points annually, more than the 2.2% historical average. By comparison, under Obama, U.S. stocks underperformed international stocks by 8.3% or 4.2 percentage points annually.

While international stocks outperformed the U.S. in the first year of Trump’s presidency, international stocks declined far more than U.S. stocks in his second year, perhaps because of the strong dollar and fears of Brexit chaos. Clearly, U.S. stocks are besting international stocks by more than the historical average and by far more than they did the first two years of the Obama administration.

Yet if the Trump market is to exceed the Obama market for a longer period of time, Trump will need even stronger performance over the next two years, because while U.S. markets underperformed for the first two years of the Obama presidency, they far outpaced international markets after that. In Obama’s first term, U.S. stocks outpaced international stocks by 22.8%, or 5.3 percentage points annually. For the eight-year Obama presidency, U.S. stocks outpaced international stock by 11.3 percentage points annually.

Clearly, key elements beyond either president’s control make it far too simplistic to give credit or blame for stock market performance to any one person, even the president.

Yet over longer periods of time, the data does make a compelling partisan distinction. U.S. stocks have fared far better under Democrats, Forbes reports. From March 4, 1929, through July 5, 2016, U.S. stocks returned an average of 1.71% under Republican administrations and 10.83% under Democratic administrations. Can this be a coincidence?

Possibly not. “The excess return in the stock market is higher under Democratic than Republican presidencies.” This is according to a paper in the October 2003 Journal of Finance entitled “The Presidential Puzzle: Political Cycles and the Stock Market, by Pedro Santa-Clara and Rossen Valkanov. The paper also states that “there is no difference in the riskiness of the stock market across presidencies that could justify a risk premium.”

Higher stock performance under a Democratic presidency is likely to persist going forward. That’s according to a working paper in October 2018 for the National Bureau of Economic Research, the paper, by Lubos Pastor and Pietro Veronesi, entitled “Political Cycles and Stock Returns,” is built around a model built to predict stock market returns. The model “predicts higher average stock market returns under Democratic presidencies, explaining the well-known presidential puzzle.”

Pastor and Veronesi, both from the University of Chicago’s Booth School of Business, say their model can also explain why economic growth has been faster under Democratic presidencies.

I do not completely buy the causation in this statistically significant correlation of long-run stock returns, and I still advise staying the course irrespective of the presidency or any other election.

Because I believe markets are relatively efficient, I don’t think I know anything the market doesn’t already know.

Author’s note: For the record, I am a registered Republican.