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

Rob Arnott, the CEO of Research Affiliates, warns against data mining while debunking research tying stock returns to the current president’s political party.

  • By Staff

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 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 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 2015.

“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 difference.”

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 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 said.

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