U.S. presidents are routinely blamed for many things that have little to do with what they actually did. On the other hand, presidents don’t shy away from taking credit for accomplishments that were set in motion by others before them.
It is a worthy exercise to review the performance of various asset classes during the tenure of our presidents since 1970. The risk here, of course, is faulty attribution — that is, the buoyant performance of any particular asset class might be attributed to the individual in the Oval Office during a particular period, or the poor performance of any particular asset class could be pinned on a certain administration.
Both assumptions would be errors, as there are simply too many other forces at work when it comes to asset performance.
Given the risk, why look at asset-class performance in this way? By doing so, we gain some perspective about the environment in which past and current presidents have operated and gain insight as to some of the economic challenges these men were saddled with, or changes they possibly influenced.
Specifically, the nation has seen vastly different levels of price inflation during the last 45 years. But before examining inflation, let’s review gross performance of various asset classes between 1970 and 2014.
LARGE-CAP U.S. STOCK
First, consider a 45-year review of large-cap U.S. stock performance (the S&P 500), likely the most common measure of the U.S. stock market. There are many important asset classes, but large cap U.S. stock is assuredly the most visible to most investors. As a result, the performance of the S&P 500 is one of the ways people evaluate the performance of each U.S. president.
Of all U.S. presidential tenures since 1970, George W. Bush’s had the roughest ride when judged against large-cap U.S. stock. As shown in the Gross Performance table on page 76 , the average annualized four-year return for the S&P 500 was negative during both of his terms (2001-2004 and 2005-2008).
In fairness to Bush, his presidency ended in a year when nearly every asset class was gutted. No other year since 1970 suffered anything like the meltdown experienced in 2008. Large-cap U.S. stock lost 37%, small-cap U.S. stock sunk nearly 34%, non-U.S. developed stock dropped 43.4%, real estate declined by 39% and commodities slipped 46.5%. No president is powerful enough to propel that degree of asset-class chaos in such a short time.
The big winners as measured by large-cap U.S. stock performance were Ronald Reagan, George H.W. Bush, Bill Clinton and Barack Obama, although with another year to go in office, the final word on Obama’s tenure is not yet in.
SMALL-CAP U.S. STOCK
The U.S. stock market is too complicated to simply be measured by one index, such as the S&P 500. This is evident as we look at the performance of small-cap U.S. stocks (Russell 2000) during the Ford and Carter administrations. While large-cap stocks foundered during their time in office, small-cap issues flourished.
Small-caps were also solid during the Reagan, elder Bush and Clinton years. During the second term of George W. Bush, small-cap U.S. stock stumbled, only to rebound during the Obama administration.
The performance of international stocks, as measured by the MSCI EAFE Index, may have little to do with who is in the White House — or perhaps it does. The time periods of negative performance occurred during the Ford era, when the U.S. was still embroiled in the Vietnam war, and both Bush administrations, marked by armed conflict in the Middle East. While the Middle East is not a component of the MSCI EAFE Index — which measures stock market performance in Europe, Australasia and the Far East —conflict in that region certainly appears to impact the performance of global markets.
U.S. BONDS AND U.S. CASH
U.S. bonds (the Barclay’s Aggregate Bond Index) and U.S. cash (90-day Treasury bills) enjoyed a heyday during the Reagan administration. During Reagan’s first term, the four-year annualized return of bonds was 15.1%, an unbelievable rate of return for a fixed-income asset class.
During his second term, U.S. bonds averaged 11.8%. Jimmy Carter’s one term and Reagan’s two were also glory years for cash. During the first term of the Reagan administration, cash had a four-year average annualized return of 11.2% and 6.6% during the second. In comparison, the real return on cash during the Obama administration has been negative.
But we need to look deeper here. What really matters is the net, or inflation-adjusted, returns of these various asset classes. Looking at the second data table, Net Performance on page 76, we see that the annualized real returns of large-cap U.S. stock were negative during the eras of Richard Nixon, Gerald Ford and George W. Bush.
During the Carter administration, large-cap U.S. stock was barely positive if measured net of inflation. However, as can be seen in the table, inflation as measured by the Consumer Price Index during Carter’s four years averaged more than 10%. That shows it’s important to examine the real performance of asset classes.
By comparison, during Obama’s first term, the average annualized inflation rate was 2.2%. These different time periods — 1977-1980 and 2009-2012 — presented dramatically different inflation climates for the respective presidents.
During the Nixon, Ford and Carter administrations, inflation was a significant problem. Reagan also dealt with relatively high inflation during his first term. The performance of U.S. bonds hit a low point during the Carter years.
The difference between gross performance and net, inflation-adjusted performance is nowhere more distinct than in the performance of cash — particularly during the Ford administration (1974-1976) and the Carter administration (1977-1980). During Ford’s term, cash had a gross three-year annualized return of 6.4%, a very impressive number compared to the return of cash today.
But, after accounting for inflation, the net loss of cash during Ford’s term was 1.5%. During the Carter years, cash had a gross four-year annualized gain of 8.8% but a net four-year annualized loss of 1.4%. This is a striking reminder of the impact of inflation on asset-class performance. And inflation is clearly not solely controlled or influenced by who is presently in the White House.
The performance of various asset classes as well as inflation can be a tailwind or a headwind for each president. Blaming presidents for bad performance or high inflation, or crediting them for great performance or low inflation might be convenient, but it would also be simplistic.
This review of asset-class performance and inflation during presidential terms may provide some historical perspective, albeit a mere glimpse. Using the information here as fodder for unearned praise or undeserved criticism for a certain president or political party would be misusing the data.
Perhaps the value of this type of historical review might simply serve as a reminder of the need to evaluate asset-class performance in net terms, that is, after inflation, rather than gross performance. Such an exercise would require expending some extra effort because performance data is typically reported in gross terms.
Armed with Consumer Price Index data, a reader can calculate net annual performance for any asset class where you have annual gross performance data. As we’ve seen, the difference between gross performance and net performance can be economically, and sometimes politically, dramatic.
Craig L. Israelsen, a Financial Planning contributing writer in Springville, Utah, is an executive in residence in the personal financial planning program at the Woodbury School of Business at Utah Valley University. He is also the developer of the 7Twelve portfolio.
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