The political ideology of the current administration may not
actually have much effect on stock returns.
In his latest attack on data mining, Research Affiliates Chief
Executive Officer Rob Arnott seeks to debunk claims that market
performance is tied to a presidents political party.
Although historical data has shown that U.S. stocks perform
significantly better under Democratic leadership, Arnott and
co-authors Vitali Kalesnik and Bradford Cornell argue in a
research note that historical statistical relationships should
be interpreted with healthy skepticism.
Arnott has recommended caution when interpreting investment
data before, often warning against factor-investing and smart
beta strategies that rely heavily on data mining and selection bias. This time, Arnott focused
on politics, examining recent research from University of Chicago
professors Lubos Pastor and Pietro Veronesi, which found that
stocks earned an additional 11 percent in average excess market
returns per year under Democratic presidents between 1925 and
It is often easy to overlook the details when
examining the broad statistics, Arnott and co-authors Kalesnik, who is head of equity research
at Research Affiliates, and Cornell, a professor of finance at the
California Institute of Technology, wrote in their note.
While the results from the University of Chicago professors
were both economically and statistically significant, the trio
said the numbers are skewed by two key events: the Great
Depression and the 2008 financial crisis.
A Republican was president during the two great
financial economic crashes that began in 1929 and 2008,
they wrote. Unsurprisingly, a Democrat held the office of
president during the immense subsequent recoveries. This
appears to explain a majority of the return
The University of Chicago professors findings may be
serendipitous as the effect would be reversed had
the order of the incumbencies been, as well, according to the
Research Affiliates note.
When Arnott and his co-authors looked beyond the U.S. to
Australia, Canada, France, Germany, and the U.K., they found no
systematic relationship between the party in power and domestic
We see no evidence that these results can be anything
but random chance and find it hard to imagine the situation in
the United States is so very different that the 10.9 percent
return gap is anything other than a statistical outlier,