The economy is emerging as one of the biggest issues in the presidential election. That’s not surprising, given that Americans have experienced the highest inflation cycle in 40 years after the money supply soared due to trillions of dollars in stimulus spending during the pandemic. A recent Motley Fool poll found that 60% of respondents considered inflation their top financial priority in the election.

The good news is that the actual inflation rate is approaching the Federal Reserve’s target of 2%. However, prices remain high, especially in key sectors such as housing, where the country faces an estimated shortage of 4.5 million homes, according to Zillowafter years of substructure.

The stock market is often seen as an important indicator for the economy. After all, important indices such as the S&P500 (SNPINDEX: ^GSPC), Nasdaq-Compositeand the Dow Jones Industrial Average Major news agencies report on these developments daily. If, for example, a recession were to occur, a falling stock market would probably be one of the first signs.

Of course, after several years of uncertainty, investors are wondering which candidate would be better for the economy and the stock market.

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Which political party is better for the stock market?

On average, the stock market has performed better under Democratic presidents in recent history.

Since 1957, when the S&P 500 was introduced, the index has achieved a compound annual growth rate (CAGR) of 7.4%, excluding dividends. Under Democratic presidents, the index has experienced a CAGR of 9.8%, while under Republican presidents it has only been 6.0%.

However, the median return was actually higher under Republican presidents, at 10.2%, while it was 8.9% under Democrats. Based on this data point, one could argue that the stock market was stronger under Republican presidents.

When you take the status of Congress into account, you get different results. A data set going back to 1926, when the S&P included far fewer than 500 companies, found that returns were nearly identical under combined Republican and Democratic administrations, when Congress was controlled by the same party as the president.

During the 13 years that a Republican administration controlled the White House and both houses of Congress, the average annual return of the S&P 500 was 14.5 percent. During the 36 years that Washington was under Democratic control, the index’s return was 14.0 percent.

A divided Congress with a Democratic president has produced a return of 16.6 percent over the 15 years since its inception. In contrast, in the 34 years with a Republican president and a divided Congress, the S&P 500 has only produced a return of 7.3 percent.

Does the president matter for the stock market?

When looking at such data, it is important to remember that correlation does not equal causation. The connection between the party in the White House and the development of the stock market is fragile.

For example, the stock market has performed best since 1957 under President Bill Clinton, when the S&P 500 rose an average of 15.2% annually. Clinton’s era benefited from the dot-com boom and the advent of the Internet, but he left office before most of those gains were wiped out by the stock market crash of 2001 and 2002. Had Clinton lasted another year or two, his average annual growth rate would have been much worse.

The president has little direct control over the economy or the stock market, which sets these areas apart from foreign policy, environmental policy, and Supreme Court appointments. In addition, there are many contingencies and cycles to consider.

While the president can influence economic policy and set the tone for the country, the U.S. economy is dominated by the private sector. About 88 percent of U.S. gross domestic product (GDP) comes from the private sector, and companies want to maximize their profits regardless of who the president is.

The recent boom in the stock market, attributed to artificial intelligence (AI), was driven by companies such as NVIDIA And Microsoftand it was sparked by the launch of OpenAI’s ChatGPT. Share prices have skyrocketed since then, but it’s a mistake to blame President Biden for those gains.

Moreover, the White House does not even control the most important economic levers operated by the federal government. For example, the Federal Reserve controls monetary policy through the federal funds rate and the money supply through the purchase and sale of securities.

Congress, meanwhile, controls fiscal policy, such as federal tax rates and the federal budget. The president can influence these institutions but does not have direct control over them.

Why the stock market will be higher in four years

Right now, conditions are looking good for a sustained bull market under the next presidency. The Federal Reserve is expected to start cutting interest rates next month, unemployment is still relatively low at 4.3%, and inflation has finally cooled to nearly the Fed’s 2% target.

At the same time, new artificial intelligence technologies are likely to continue to drive the stock market higher through billions in investments and new products as companies push for artificial general intelligence (AGI) and innovations such as self-driving cars.

As important as the upcoming election is, it is a mistake to base your investment decisions on who ends up in the White House. The connection is not as strong as it seems.

Right now, it looks like the stock market will continue to rise over the next four years, regardless of who is in the White House.

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