Do certain market industries outperform when Democrats or Republicans hold the U.S. presidency, or during certain years of the presidential term? In their recent paper entitled “Political Cycles in US Industry Returns”, Jeffrey Stangl and Ben Jacobsen investigate whether specific industries tend to perform better: (1) under Democratic or Republican presidents; and (2) during the last two years of a presidency. Using return data for 48 industries representing all stocks listed on the major U.S. exchanges during 1926-2006, they conclude that:
- Across the entire sample period, most industries perform better under Democratic than Republican presidents, as does the broad market.
- There is some evidence by industry that small-capitalization firms perform better under Democratic than Republican presidents.
- Adjusted for market, size and value (book-to-market) factors, specific industries neither outperform nor underperform persistently with respect to party holding the presidency. There are no “Democratic” or “Republican” industries.
- Adjusted for general market movement, there is no evidence of an industry-level presidential election cycle effect. Over the long term, industry returns reflect broad market returns.
The following chart, taken from the paper, summarizes returns for a broad value-weighted stock market index by presidency during 1926-2006. In general, industry returns mirror these results, refuting a contention that a having Democratic or Republican president benefits specific industries.
In summary, evidence does not support a belief that investors can generate excess returns using an industry allocation strategy based on U.S. presidential politics. Equity return anomalies based on party holding the presidency and presidential term year are marketwide phenomena.
