Presidents are widely blamed and take much of the credit for stock market performance during their time in office. However, a president's ability to influence the economy and markets is generally indirect and marginal.
Congress sets tax rates, passes spending bills, and writes laws regulating the economy. That said, the president can influence the economy and the market in different ways.
- Presidents have very little impact on the stock market, but they still seem to get some credit when performance is good, and more responsibility if markets are down.
- Generally, Congress and the Federal Reserve can play a larger role than the president in directly shaping markets.
- Budget spending laws passed by Congress can influence market sentiment.
- The independent Federal Reserve can have a significant impact by raising (lowering) or lowering (bullish) interest rates.
- A bullish sentiment in the stock market can improve a president's popularity, while a bearish outlook in the stock market can undermine a president's reputation.
How Presidents Impact the Stock Market
Since the president is responsible for implementing and enforcing laws, he exercises some control over business and market regulation. This control can be direct or through the president's ability to appoint cabinet secretaries, such as the head of the Department of Commerce, as well as trade representatives.
The president also appoints the chairman of the Federal Reserve, who sets monetary policy with other Fed governors and members of the Federal Open Market Committee. The Fed is an independent government agency whose mission is to set monetary policy that ensures economic growth, low inflation and low unemployment.
These monetary policy actions can impact the stock market, although the Fed generally does not view stock market performance as an isolated factor that can influence its decisions. How hawkish or dovish the person chosen to chair the Fed is on monetary policy will determine their impact on the economy.
All presidents would like to lead during times of economic expansion and a rising stock market because it generally increases their chances of being re-elected. As President Bill Clinton's campaign manager, James Carville, once said, “It's the economy, stupid.”
This chart shows how the price of the S&P 500 has changed during each four-year presidential term since 1953. Two of the terms have two names because President Kennedy was assassinated before the end of his term and President Nixon resigned before the end of his second term. . Their terms were completed by their vice presidents, Lyndon Johnson and Gerald Ford, respectively.
Technically, no CEO has become president. In fact, Donald Trump might be the closest contender for that title. He served as chairman of the Trump Organization before becoming president of the United States. Many have tried, and we will likely see more attempts in the future.
Presidents and the NYSE
A sitting president will rarely visit the New York Stock Exchange. Sure, the statue of President George Washington is right across the street at Federal Hall, but the exchange was barely established during his tenure.
On January 31, 2007, President George W. Bush visited the New York Stock Exchange. He had just given a speech on the economy across the street at the aforementioned Federal Hall, where he chastised corporations for excessive executive compensation. Little did he know that the country was on the verge of a financial crisis and its longest recession since the Great Depression.
S&P 500 under Biden
Under Biden's presidency, the S&P 500 index struggled at first, but recently hit a record high in early 2024. Biden took office in January 2021, when markets were still rebounding after losses suffered due to the COVID-19 pandemic. After initially peaking in January 2022, the S&P index was buffeted by interest rate hikes as the Fed sought to contain inflation. Rising interest rates caused the index to decline for most of 2022. Throughout 2023, the market showed increased volatility as market participants speculated on the magnitude and timing of further rate hikes from the Fed. After the Fed announced the end of rate hikes, the S&P index began to climb, surpassing 5,000 for the first time in February 2024.
Does it matter who the president is when it comes to stock market performance?
History shows that neither party affiliation nor the choice of office holder has a direct effect on stock performance.
Do government policies have an effect on stock market performance?
Yes, government policies can have an effect on stock market performance, particularly to the extent that they implement large fiscal spending programs. Market investors view additional government spending as a boon to consumers and then to the market.
Do tax cuts count as budget spending?
Tax cuts are a form of fiscal stimulus because they leave more money in consumers' pockets, spurring personal spending and generally bullish sentiment among investors.
Do Fed policies impact stock market performance?
Yes. The Federal Reserve is an independent government agency that sets monetary policy by raising or lowering interest rates, among its main tools. Higher interest rates, or speculation about them, generally have a downward impact on stocks. The idea is that higher rates will increase the cost of borrowing and be a drag on the economy as a whole. Lowering interest rates can have the opposite effect, unless the easing of monetary policy is due to a weak economy.
Even though the president can influence the economy through economic policies and programs that can impact the stock market, he probably gets too much blame and too much credit when the stock market goes down or up. This is because larger macroeconomic events generally determine long-term investment sentiment.
A strong or bullish stock market, by increasing consumer optimism, can boost the president's popularity and benefit the incumbent president come election time. The same can be said if the stock market is down and investor sentiment is pessimistic, which bodes ill for the incumbent president at the time of the vote. We could therefore say that stock market performance has a greater influence on the choice of president, rather than the reverse.