Sven Henrich via Northman Trader

Since 1900 markets have had their fair share of crashes. Mind you crashes don’t happen that often, in fact crashes are very rare. You know what’s also very rare? A particular party being in power preceding crashes. Every single time, making them the crash party.

Oh don’t start hating on me. This is not a political post, but I know how tribal politics are these days and you say one thing about anyone or party you get hammered. For the record: I’m not a Republican and I’m not a Democrat. Tribalism, parties, clubs, it’s just not in my DNA. I’m an independent or outsider or whatever label fits.

I analyze charts, trends, macro data. And people who have followed me for a long time know I’ve been ranting about the Fed during the Obama administration as much as I am now. So this post has nothing to do with party, but with history and the data is surprising.

First off, what were the big crashes since 1900?

In chronological order:

The panic of 1907. This is what ultimately resulted in the formation of the Fed to not to let something like this happen again.

Of course it did as the next crash came in 1929. Then we went on to various recessions, ups and downs and stagnation in markets for decades.

The next famous crash came in 1987. Black Monday. Over 20% in a swift flush.

Then of course came the Nasdaq tech crash in 2000 and then of course the great financial crisis in 2008/2009.

All of these periods came on the heels of market excess, massive rallies, vast optimism, and then the busts came.

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But here’s the weird thing: ALL of these crashes happened following more than 2 years of GOP control of the Senate, or combined with control of the presidency and in one case the House and the Senate but not the presidency:

To appreciate how historical this is: These are also the ONLY times the GOP has had such control. To see the full history visit: Divided Government.

What you will find is that historically there’s a board spread of control with Democrats more often than not controlling both the House and Senate. And yes, there was trouble too once when Democrats controlled everything. 1937 is an example. Big nasty recession during the Great Depression. But that was it really. Real market crashes appear to only occur during GOP led times.

History shows Republican control of government is historically rare and when this control happens for more than 2 years a market crash has occurred every single time.

Don’t yell at me, that’s just the history. If there’s a crash the GOP controlled the Senate for more than 2 years. Every single time. The ONLY time that there was no crash was during the 2 years the GOP controlled the House, the Senate and the presidency in the 2 year period in 1954-1955. But as soon as the Senate is controlled by Republicans for more than 2 years a crash has occurred every single time.

1907, 1929, 1987, 2000, 2008. Sorry GOP fans, but none of these crashes occurred following Democrat control of the Senate or the government at large.

One can speculate as to why that is or whether this is just a giant coincidence. If it is a giant coincidence then one could argue that’s just an extraordinary string of bad luck. If one is to look for correlation one may point to a GOP habit of cutting taxes, promising the moon on growth and markets overheating as a result, creating massive market excess in the process, the unwind of which then results in a crash. I don’t think that argument would hold true in the 2000 scenario, much of this was the technology boom and the Fed adding liquidity in 1999 for Y2k.

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But in 1986 Ronald Reagan cut taxes and markets rallied until they crashed in 1987.  George Bush cut taxes in 2001 and then again in 2003. Deficits again rose, markets rallied hard into 2007 and then the financial crisis came.

I don’t think any fair minded person can blame the GOP solely for market crashes and I’m not doing that. Major crashes happen as a result of a combination of multiple factors, but all relate to market excess, excess optimism and more often than not artificial financial infusions, be it central banks, tax cuts and heavy deficit spending. And then markets go overboard, disconnect too far from the fundamentals and then set up for a violent reversion which then brings about the recession and/or crash.

I suggest that all these elements are again at play: We’ve had massive tax cuts, have trillion dollars deficits, massive optimism and massively stretched valuations and guess what else: Republicans in charge for over 2 years of the Senate and the presidency. The crash party?

Don’t go around saying I’m calling for a crash. I’m not. History is.


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