Judging Administrations by the Stock Market

Since Donald Trump was elected, the stock market has been on a tear.  The S&P 500 Index has soared from 2085 to 2579, a nearly 24% increase.  The president’s supporters point to this increase as evidence of the effectiveness of his administration.  So, I thought it would be interesting to look at the market’s performance under previous administrations to see how the Trump administration compares.  I used Macrotrend’s inflation adjusted historical data to make comparisons [click here].

This is what the chart looks like for the total increase/decrease during each administration since Carter.

The market increases during the Clinton administration dwarfs all others.  I found it interesting that the appreciation during the Reagan administration was only about average, since that period is often heralded by Republican as some kind of golden age of economic growth.

Of course, looking at the aggregate increase for the entirety of each administration is not a fair comparison for the Trump administration, since it has only been one year since his election.  If we look at the average annual increase for each year, the Trump bump looks much more impressive, coming in second only to Clinton (22% vs. 21%).

 

But, if you look at the increase during the first year after the election, Trump takes first place, edging out Bush 41 and Obama (23% vs. 21% vs. 18%).  Note that the index was actually down during the first year of the Reagan administration.

So, what are we to make from this mishmash of data?  The answer is: not much.  While the political backdrop is important for the stock market, there are nearly an infinite number of other factors that also affect the markets, not the least of which is interest rate policy as set by the Federal Reserve.

It is undeniable that there has been a surge in business optimism since Trump’s election -most likely a wave of relief after eight years of the business-unfriendly, regulation-happy, Obama administration. And frequently psychology is as important, if not more so, than economics to the stock market.  But in the long run, economics wins out.

The real reason the market has steadily increased since 1950 is that corporate profits have increased.  In fact, there is nearly a perfect correlation.

 

If corporate profits keep going up, so will the stock market.  Of course, if the Republican tax bill is approved and corporate income taxes are slashed, those savings will immediately go to the bottom line and further support higher stock prices, at least to the extent that this is not already baked into the market.

The bottom line is that while who the president is and what his or her policies are obviously have an effect on the stock market, it is a mistake to credit any president with causing the markets to go up or down.  To believe otherwise, one must credit the Obama administration with causing the largest dollar increase in corporate profits and stock prices in the nation’s history, a proposition many would have a hard time accepting.

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