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Forbes: Stephanie Withers was featured in the article, “Trump Vs. Clinton: How Will The Stock Market React To The Election?”

“Trump Vs. Clinton: How Will The Stock Market React To The Election?,” by Ky Trang Ho, Forbes.

The Dow Gains 7% On Average Annually Under Democratic Presidents

By Stephanie T. Withers

This election season has been nothing if not unusual, leaving many voters undecided. If history is a guide, how might the market and the economy vote if either had a seat in the Electoral College? While the reasons are opaque, the historical data is clear. The U.S. equity market and economy perform better under Democratic presidents.

Consider the evidence. The average annual return of the Dow Jones Industrial Average Index (DIA) from 1901 through September 2016 has been 4.5%. Under Democrat presidents, the index has returned 7.0% on average, while Republican administrations have seen a 3.0%.

What about the economy? Superior market returns under Democratic presidents may seem counter-intuitive, as the general view of the GOP is as a pro-business party. So what about the underpinning economic performance in Democrat vs. Republican administrations? Again, the data is clear.

In 2015, Princeton economists Alan Blinder and Mark Watson published an extensive study on the topic, finding a significant performance gap in Democrat vs. Republican administrations. They found the Democrat-Republican performance gap in annualized gross domestic product growth to be 1.8 percentage points. They based the analysis on postwar data, covering 16 presidential terms from Truman to Obama.

This raises an obvious question: Did each term benefit from a prior administration’s policies? Blinder and Watson explored that question by breaking down growth by year. The advantage does, come mostly in the first two years. But Republican administrations have historically benefitted from higher growth rates coming into office. Democrats inherit a 1.94% growth rate from the last year of the prior term, while Republicans inherit 4.25%. Growth tends to accelerate when a Democrat takes office and slows during a Republican administration.

There are many important differences between the candidates’ positions that will impact the economy – trade, tax reform, fiscal policy, etc. But if history is a reliable guide, a Clinton administration is likely better for markets. Moreover, markets have responded to political news as though investors favor a Clinton victory. Certain sectors, in particular, react more to changing political winds notably, healthcare, manufacturing and energy.

As Democratic poll numbers have strengthened enough to suggest a possible Democratic sweep, the healthcare sector sold off, as a Democratic administration and Congress would provide headwinds for healthcare company profitability. However, manufacturing clearly prefers Trump’s anti-trade rhetoric, and the energy sector would favor a Republican administration.

Stephanie T. Withers, based in San Francisco, is a senior vice president of Bel Air Investment Advisors with more than $6 billion under management.

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