It’s that time of the presidential cycle again: when a new leader takes over, and the financial media produces a flood of articles speculating on his likely impact on stocks, and assessing his predecessor’s performance. Barack Obama presided over the third-best stockmarket showing since the World War II, says Matthew Heimer on Fortune.com.
The S&P 500 returned an annual average of 12% during Obama’s eight years. Only Bill Clinton and Gerald Ford did better, with annual gains of 14.9% and 18.6% respectively. Democrats have outperformed Republicans since 1945, with respective average annual gains of around 10% and 6%.
Investors should, however, ignore discussions of this kind – stocks don’t care who is president. Stock prices usually go up in any case, and correlation is not causation. More broadly, other people than the president are more responsible for economic and corporate performance on a president’s watch, says John Authers in the Financial Times. There is a limit to what a president can do: his programme can always be stymied in Congress, while the wider economic backdrop is crucial. Ford benefited from the rebound from the global oil crisis; Clinton rode the technology boom.
Obama’s performance is due largely to loose monetary policy from the Federal Reserve, which has given the post-crisis rally a lot of extra pep. The only variable that can really help us gauge what markets could do under a particular president – “as with any investment” – is the “starting price”, says Authers. Valuations eventually revert to the mean, so value is the key determinant of long-term returns.
Using the cyclically adjusted price/earnings ratio (Cape) as a measure of long-term value, it’s no wonder Ronald Reagan managed annual average returns of 9.4%. He took over when the Cape was in single digits, with the markets bombed out after a decade of high inflation. George W Bush took over when the Cape had hit 37, the most overvalued market under any president. The bear markets of the 2000s reduced valuations to a much more reasonable 15. The average since the late 19th century has been 16.
Today, the Cape has reached 27, a level exceeded only in 1929, 2000 and 2007 – all of which marked the peaks of huge bull markets. This reflects the fact that we are far closer to the end of the cycle than the beginning. Indeed, this recovery has been one of the longest since the war. So long-term returns are unlikely to be very impressive from here. If President Donald Trump manages two terms, he is unlikely to finish ahead of Clinton or Obama in the presidential league table.