Market Returns by Political Party

Key Concepts

• Political Regime: The combination of the U.S. Presidency and the control of Congress (House and Senate).
• Market Sweep: A scenario where one political party controls the Presidency, the House, and the Senate.
• Split Congress: A scenario where one party controls the House and the other controls the Senate.
• Recency Bias: The tendency to over-rely on recent events (like the last 3–4 midterm years) when making predictions, ignoring long-term historical data.
• Median vs. Average Return: Statistical measures used to evaluate performance; median is often used to mitigate the impact of extreme outliers (e.g., a single 45% growth year).

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1. Market Returns and Political Regimes

The video analyzes S&P 500 performance from 1953 to the present, categorizing returns based on the political makeup of the U.S. government.

• General Trend: Regardless of the party in power, the stock market has historically trended upward over the long term.
• Sweep Comparisons:
  • Republican Sweep: Historically shows an average return of 13.3% and a median of 13.1%.
  • Democratic Sweep: Historically shows an average return of 8% and a median of 10.5%.
• The "Worst Case" Scenario: A Republican President with a full Democratic Congress is identified as the most bearish environment, with an average return of 4.9% and a median of 4%. This is attributed to historical data showing that many recessions occurred under this specific power dynamic.
• The "Bullish" Scenario: A Democratic President with a split Congress is the most bullish, yielding an average return of 17% and a median of 18.3%.

2. Data Distribution and Outliers

The speaker emphasizes that averages can be misleading due to extreme years:

• 1954 (Republican Sweep): The S&P 500 returned 45%. This single data point significantly inflates the average return for Republican sweeps.
• 2008 (Republican President/Democratic Congress): The market dropped over 38%, contributing to the poor performance metrics for this specific regime.
• Consistency: Democratic Presidents with split Congresses have shown remarkable consistency, with no negative years recorded in the analyzed seven-decade period.

3. Asset-Specific Insights

• The U.S. Dollar (DXY): Since 1980, the dollar tends to drop the most under a Republican sweep and performs best under a Democratic President with a Republican Congress. The speaker notes that while recent midterm years saw the dollar rise, historical data going back to 1980 shows it often declines during midterms.
• Bitcoin: Data is limited (starting from 2013).
  • Median Returns: Both Democratic and Republican sweeps have been bearish for Bitcoin.
  • Volatility: Bitcoin’s average returns are heavily skewed by the 1,300% gain in 2017.
  • Hypothesis: The speaker suggests Bitcoin may perform better under "split" governments because the resulting legislative gridlock reduces uncertainty, preventing either party from pushing through radical policy changes.
• Gold: Contrary to popular belief, gold performs best under a Republican sweep. The worst returns for gold occur under a Democratic President with a Republican Congress.

4. Methodological Framework

The analysis relies on:

1. Objective Data Filtering: Using 1953 as the starting point to ensure consistency in how political parties are defined.
2. Comparative Analysis: Evaluating both average and median returns to account for volatility and outliers.
3. Business Cycle Correlation: Linking market performance to the "business cycle" and suggesting that market resets (recessions) may be more likely under specific political configurations (e.g., Republican President/Democratic Congress).

5. Notable Quotes

• "The market for the most part just goes up and to the right no matter who's in power."
• "If you're going to have a sweep, history shows that a Republican sweep is actually more bullish than a Democratic sweep. And if you're going to have a Republican president, the worst outcome for the markets is when you have a Democratic Congress."
• "Maybe Bitcoin likes [gridlock]... when you have a Democratic president and a Republican controlled Congress... it leads to less uncertainty because they can't just push stuff through as easily."

Synthesis and Conclusion

The data suggests that while political parties influence market sentiment, the "sweep" vs. "split" dynamic is a more significant predictor of returns than the party label itself. Republican sweeps have historically provided higher average returns for equities and gold, but they are also associated with higher volatility and specific "worst-case" scenarios when Congress is controlled by the opposition. Conversely, Democratic presidencies paired with split or opposition-controlled Congresses have historically provided the most stable and bullish environments for the S&P 500. The speaker concludes that investors should avoid recency bias and focus on the historical reality that legislative compromise (gridlock) often creates a more favorable environment for asset growth.