Presidents, CAPE Ratios, and Stock Market Returns

Going back to 1901, Democratic presidents have averaged a 12.4% annualized return (S&P 500, Total Return) during their time in office versus only 6.9% for Republicans.


While presidents are often credited or blamed for stock market performance, the truth is that their policies (good or bad) have little to nothing to do with short-term stock market returns.

What is important to returns? Valuation when they enter office and multiple expansion/contraction during their tenure.

On average, Democrats have inherited an average CAPE ratio (or Shiller PE) of 14.9 versus 16.6 for Republicans. While not a huge differential, even this small edge was helpful as lower valuation tends to lead to higher future returns on average (see recent post here on valuation and forward returns).



Equally important, though, is the fact that multiples have expanded under Democratic presidencies by 23% (from 14.9 to 18.2) while multiples have contracted under Republicans by 12% (from 16.6 to 14.5).

Also, if we look at the table below, sorted by beginning valuation, you’ll notice that the four highest starting valuations all occurred during Republicans administrations.

The highest in history was under George W. Bush who started with a CAPE ratio of 37.0 (shortly after the Tech Bubble peak) only to see that fall to 15.2 when he left office after the Great Recession. Next was Herbert Hoover, who took office with a CAPE ratio of 27.1 and saw that fall to 7.8 after the Great Depression. Richard Nixon also inherited a relatively high CAPE Ratio of 21.2 and saw that fall to 10.4 after the 1973-74 Bear Market and Recession.


So you have the four worst Bear Markets in history (1929-32, 1973-74, 2000-02, and 2007-09) all occurring mostly under Republican administrations (Hoover, Nixon, and Bush II) that came to power with a high starting valuations. That almost entirely explains the performance differential.

The other big factor is that high starting valuations were not always an impediment for Democratic presidents. For example, Bill Clinton took office with a CAPE ratio of 20.3 and saw that expand to 37.0 when he left office. This expansion during the Tech Bubble was the major factor in producing the 17% annualized return during his time in office.

LBJ also inherited a relatively high CAPE ratio of 20.7 in 1963 but did not see that ratio mean revert during his time in office but expand to 21.2. With strong earnings growth and a roughly 3% dividend yield during this period, the S&P 500 returned over 11% per year.

Valuation and the Next President

With a current CAPE ratio of 27.1 (above the 90th percentile historically), the next president is likely to inherit one of the highest starting valuations in history. Traditionally, that has meant below average returns going forward.

Additionally, the next president will take office after a 7+ year expansion when the longest expansion in U.S. history was 10 years.

In short, it is not likely to be easy going for the next president from a stock market or economic perspective. Which is to say that whoever the next president is may be looking at a single term, for they are likely to be blamed for poor stock market/economic performance even if that has nothing to do with their policies.

“To the victor goes the spoils” is an old political saying but in this case those spoils come with some heavy strings attached: the inheritance of a stock market with relatively high valuations and a long in the tooth economic expansion.

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

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