Arnott: Markets Don’t Care Who’s in Office

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 CEO Rob Arnott seeks to debunk claims that market performance is tied to the president’s 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 that historical statistical relationships should be interpreted with a “healthy skepticism.”

“It is often easy to overlook the details when examining the broad statistics,” they wrote.

g 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 2015.

While these results were both economically and statistically significant, the Research Affiliates 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, respectively; unsurprisingly, a Democrat held the office of president during the immense subsequent recoveries,” they wrote. “This appears to a explain a majority of the return difference. Had the order of the incumbencies been reversed, the effect would be reversed, suggesting the finding may be serendipitous.”

Furthermore, 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 market returns.

“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,” they concluded.