Policy or Fundamentals: What Drives Markets?

Jeff Buchbinder | Chief Equity Strategist

Last Updated: January 28, 2025

Additional content provided by Kent Cullinane, Analyst, Research.

Following the second inauguration of President Donald Trump, we decided to conduct a deep-dive analysis of stock market performance under different presidential administrations, hoping to glean some insight on if policy outweighs fundamentals.

With President Joe Biden’s presidency officially closed, we can now see that the stock market, as measured by the Dow Jones Industrial Average (Dow), rose 39.4% under his leadership. When comparing it to Trump’s first term, Biden lagged by nearly 20%, as the Dow gained 57.4% under Trump (we us the Dow for this analysis because of its longer history). While lagging by nearly 20% may sound bad, comparing both Trump’s first term and Biden’s term to President Barack Obama’s, where the Dow increased nearly 150% (albeit through two consecutive terms, rather than Trump and Biden’s one term a piece), shows that, in this small sample size, political party did not meaningfully impact performance. To put those numbers in context, on an annualized basis, the average annualized return was 8.7% under Biden, 12.0% under Trump, and 12.1% under Obama. Considering the average annualized return of the Dow since inception is 5.4%, all three presidencies outperformed, regardless of political party.

For a more comprehensive review of stock performance by presidency, we’ve calculated the cumulative and annualized returns of the market since inception.

Biden Adds to Strong Stock Market Performance

Dow Jones Industrials Performance by President

Source: LPL Research, FactSet 01/21/25
Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

Key Takeaways:

The average annual return regardless of political party was 5.4%

Under the 22 presidential terms analyzed, the market was up 16 times (73%)

In an up market, the average annual return was 10.1%

Out of the remaining six down periods, the average annual return was -7.3%

Broken out by Political Party:

Republicans:

The average annual return under a Republican president was 4.3%

The market was up in nine out of the 13 periods

The average annual return in an up market was 11.0%

In the remaining four down periods, the average annual return was –10.7%

Democrats:

The average annual return under a Democratic president was 6.9%

The market was up in seven out of the 9 periods

The average annual return in an up market was 9.1%

In the remaining two down periods, the average annual return was –0.6%

While it’s interesting to analyze how the market has performed under different political parties, it’s worth noting that regardless of party, the markets have averaged a positive annual return in 16 of the 22 administrations, or roughly three-quarters of the time.

Political policies under different administrations and political affiliations can certainly influence stock market performance, but their impact is often more indirect and short-term compared to long-term fundamental drivers, such as corporate earnings and economic growth. For example, a new administration might introduce policies that are perceived as pro-business, which could boost investor sentiment and underpin a market rally. Conversely, policies that may increase regulation or taxes might have a negative impact on stock prices.

While it’s hard to keep political biases out of investment decisions, it has proven more fruitful to be fully invested regardless of the political party in office. Both parties have seen the market rise under their administration more times than not, and a prudent investor understands that staying the course and harnessing the power of compound returns, while not missing out on potential growth opportunities by being too cute with market timing, can lead to significant wealth accumulation over the long term.

Important Disclosures

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor's holdings.

This research material has been prepared by LPL Financial LLC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

For Public Use – Tracking: #688328

Article written by: Jeff Buchbinder

Jeff Buchbinder, CFA, provides the top-down view of the stock market for LPL Financial Research. He has over 25 years of experience in equities.