Does the US Presidential Election Impact the Stock Market?

By | November 6, 2012

There’s a lot of uncertainty about the outcome of this November’s U.S. presidential election. That uncertainty extends to the impact of U.S. elections on stocks prices, judging by the voluminous and often contradictory research on the topic.

The most frequently cited paper, according to Davis, is a 2003 article in the Journal of Finance by Pedro Santa-Clara:

[The authors] found 9% higher stock market gains for large stocks in Democratic administrations since 1928. However, Santa-Clara and Valkanov did not correct for swings in market volatility or examine periods before the Depression, when market volatility was lower. In a 2004 paper, two Federal Reserve economists, Sean Campbell and Canlin Li, made those corrections and found that the 9% higher return dropped to 4%. They concluded that market returns don’t track with which party wins presidential elections.

A more recent article, “How Political Conventions Affect Stocks,” noted that in the 16 presidential election years since 1948, the S&P 500 rose during 11 Republican conventions (as measured from the start to the end of the convention), according to a report by S&P Capital IQ. In contrast, stocks made gains during only seven Democratic conventions.

Below is a list of additional articles published in the past five years that examine the link between US presidential elections (and administrations) and stock market performance.

Do Election Cycles Sway the Markets?

  • In “7 Fascinating Facts About How US Presidents Affect The Stock Markets,” editor Sam Ro briefly annotates several oft-repeated statements such as: “the third year of a President’s terms is usually the best for stocks” and “since 1900, only five presidents have seen stocks rise more than 50% during their term.” (Business Insider, March 2012)
  • CFA Institute’s latest survey of US members poses this simple question: Will the outcome of the election have an effect on the economy? A larger-than-expected 80% of survey respondents say that it will have an important impact on the economy going forward. Good news for people hoping something, anything really, gets going in Washington to remedy our economic malaise. (Market Integrity Insights, October 2012)
  • In this podcast, Robert Stammers, CFA, talks to Michael Gayed, CFA, a co-portfolio manager at Pension Partners, to get a sense of what may happen after the election. Gayed often comments on macroeconomic trends and their effect on the capital markets. (Inside Investing, October 2012)
  • The last seven months of an election year almost always boost stockholders’ portfolios, with the market having delivered positive returns for S&P 500 stockholders in all but two election years since 1952, according to “Presidential Elections are Good for Stocks, But …” (Christian Science Monitor, February 2012)
  • In a client note, Goldman Sachs offers “3 Reasons Why US Investors Should Take Election Cycles Very Seriously.” First, the political stakes in presidential, parliamentary, or legislative elections often translate into changes in policies that can reshape the economic environment. Second, the regularity with which elections take place in most countries may give place to cyclical patterns in government and investment behavior. And third, elections can markedly increase political and social uncertainty. These three factors have the potential to affect all asset classes, especially equities, given their strong sensitivity to changes in the economic outlook. (Business Insider, February 2012)
  • In “Electoral Maths: Presidential Elections and the S&P 500,” FT editor John McDermott addresses the performance of US equities in past election years and the implications for 2012. (FT Alphaville, December 2011)
  • Back in 2010 — two years into President Obama’s term — Jeremy Grantham, the chief investment strategist at GMO, noted that despite precarious economic growth and the fact that stocks weren’t all that cheap, in the near term, there was a good chance that the market would rally. Why? Because at the time, the US was “entering the sweet spot of the presidential election cycle” and “it’s very hard to bet against it.” As the reporter noted in “A Presidential Reason to Buy Stocks,” “a cottage industry has sifted the data going back more than a century and found that the stock market has generally done much better in the second half of a president’s four-year term than in the first.” (The New York Times, October 2010)
  • In “The Presidential Term: Is the Third Year the Charm?” the authors respond with a decisive yes, noting that their research shows “equities have generally prospered in the second half of a president’s term and especially during the third year.” (Journal of Portfolio Management, Winter 2008)

Does the Stock Market Pick the President?

  • InvesTech Research of Montana says the stock market is the most reliable indicator of who will win the presidency and has been for more than 100 years, according to “Stock Market Picks 90 Percent of Presidential Elections.” In other words, “the election is a reaction to the stock market.” (US News & World Report, February 2012)
  • In her article, “Does the Presidential Election Affect the Stock Market?,” financial planner Lydia P. Sheckels notes that while some believe the results of the election affect stock market returns and others have concluded that it is the stock market’s returns that affect the results of the election, she errs on side of the latter. (Financial Planning Association, August 2012)

 

Complied from http://blogs.cfainstitute.org/investor/2012/08/31/weekend-reading-does-the-us-presidential-election-affect-the-stock-market/

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