Presidents frequently point to stock market performance as a key benchmark proving the success of their administration. And political commentators are quick to give the president credit– or blame– for the stock market’s performance.
President Trump frequently tout the stock market as a key indicator of his success as a president. The Dow Jones Industrial Average, NASDAQ Composite, and S&P 500 Index continue to soar to record highs under the Trump Administration.
As the bull market in equities pushed full steam ahead after posting record numbers in 2014, revealing a full recovery from stock market lows in 2009, President Barack Obama cited a “record stock market” along with a litany of other positive indications that the American economy was booming under his watch.
When stocks suffered sharp losses mid-2007, the Bush White House scrambled to find an explanation, and assure voters that the economy was strong. In August 1998 when markets suffered a historic sell-off that wiped out the year’s gains, Bill Clinton was mid-flight to Moscow. He instructed his Treasury Secretary from Air Force One to tell reporters the economy’s fundamentals were still strong due to “the sound policies we’ve been following”.
A critical question emerges: Just how much impact does a president have on stock market performance?
Comparing Two Presidents In The Stock Market
With equities markets hitting record highs in 2019, it may be surprising to compare the cumulative growth in the major benchmarks day-for-day between the first terms of Donald Trump and Barack Obama. As it turns out, growth in all three main indices was markedly higher 1,000 days into Obama’s presidency than it was at the same time in Trump’s administration.
Just a little over a thousand days into Trump’s presidency, the S&P 500 has grown by over a third. That many days into Obama’s first term, the S&P 500 had increased by more than half. Using the stock market as a benchmark of presidential success, one could say Obama was the “better president.”
But not so fast…
There are many factors that influence stock market performance that are outside a presidents’ control. And at a more fundamental level of analysis, the stock market is not the economy itself. Stock prices should not be conflated with the actual value of the economy.
The stock market represents the expected value of the economy, which can range from expectations based on careful consideration and specialized knowledge, to expectations based on ignorance, rampant euphoria, and wild speculation. But White House policy is an important component of this dynamic, expectation-driven price seeking process for stocks.
Factors Presidents Can Control
With their vast power to drive the federal policy agenda for four to eight years, presidents certainly have some impact on stock market performance.
Tariffs / Trade Policy
Tariffs are federal taxes on imported goods. Before the federal income tax amendment and bill in 1913, tariffs were the primary source of revenue for the United States government. Tariffs are usually under the purview of Congress, but presidents can levy them if they claim it’s in the national defense interest. This can directly impact stock prices from the Oval Office.
We’ve seen that presidential impact in real time when Trump has tweeted threats to escalate the trade war with China and markets reacted negatively. When the administration increased tariffs on Chinese imports this May, $1 trillion was wiped off equities markets in a single day of trading.
There is also a strong consensus among economists that the Smoot Hawley tariffs signed by Herbert Hoover in 1930 accelerated the Great Depression. The Dow spent the next nine quarters in freefall.
Regulation / Deregulation
The executive branch of government has a lot of leeway to write and set regulations to implement legislative statutes in different sectors of the economy and government.
Trump era deregulation seems to have bolstered US stock values by easing the time and cost burden of regulatory compliance.
Obama’s health insurance regulations, via the Affordable Care Act, delivered more profits to publicly traded health insurance and hospital corporations. This likely boosted their stock values over the Obama years, because when “Obamacare” was ruled unconstitutional by a federal judge in Texas, these stocks plummeted.
Fiscal Policy
Because the federal government looms large on the macro landscape, its fiscal or budgetary policy creates strong headwinds for the rest of the economy. How much Washington spends, how much it taxes, and how much it borrows to pay for deficits all affect the stock market.
While Congress, and more specifically the US House of Representatives, has the “power of the purse” to set budgets under the Constitution, the president has a major impact on the process by submitting budget proposals (especially when their party holds a majority of seats). Even when the opposing party controls Congress, it has to work with the president or face their veto.
President Eisenhower’s famously frugal fiscal policies may have given the economy room to breathe and grow, which gave the stock market a lift. When Nixon was president the economic headwinds were brutal, but his policies may have factored in.
War and Foreign Policy
Oil prices usually track with equities prices in a positive correlation, but during the terrifying stagflation of the 1970s, stocks were crushed over US involvement in the Arab-Israeli war, which sent oil prices flying from $20 a barrel to over $50 a barrel in the wake of an embargo against the US by Arab states in 1973. The following year the US entered a recession. The stock market lost 45% of its value over those two years.
Factors Presidents Can’t Control
But stock market performance under presidents of any political stripe has many non-presidential factors underlying it.
Corporate Initiative and Management
The fundamental value of publicly traded businesses (which is their ability to deliver profits) is the center of gravity of the stock market’s performance.
That has as much to do with the performance of those who own, manage, and operate those businesses as it does with the conditions of the political macro landscape. There are other macro factors over which the US president exerts little or no control.
Fed Actions and Monetary Policy
The target interest rate set by the Federal Reserve is one of the main ones. The president does nominate the Fed Chair, so there is some presidential influence over monetary policy. But ultimately the Fed operates independently of the president and congress.
The Federal Reserve is the central bank of the United States. It can exert massive influence over stock prices by pumping money into the financial system, or conversely by hiking rates.
The stock market stumbled in 1981 during Fed Chair Paul Volcker’s belt-tightening rate hike war on inflation. It recovered from the 2007-2008 recession during unprecedented quantitative easing policies under Fed Chair Ben Bernanke.
Bubbles / Boom and Bust Cycles
Another major driver of stock performance is bubbles and the boom and bust pattern of the business cycle. The entire stock market boomed, and then crashed at the end of the 1990s on the tech bubble as an early rush of over-investment overvalued many tech companies in the wake of the growing broadband industry.
Presidents can’t control how the timing of their election fits into the broader market cycle. Obama took office in the middle of the Great Recession, set off by the subprime lending crisis, which revealed a number of systemic flaws in the financial system, and led to a massive credit crunch and economic contraction.
By the time Obama took office, stocks may have been at their rock bottom values, with nowhere to go but up. So does that mean Obama really was better for the stock market than Trump, or would we have seen a similar result if McCain had been president?
Conclusion
The relationship between stock market performance and presidential performance is complex and multi-variate. Examining this relationship closely, a nuanced answer emerges.
A presidency can have a significant impact on stock market performance, but is far from the only major factor. To see how stocks performed under different White House administrations, view our Stock Market Performance by Presidents page.
