Hope for Stocks Around Inauguration Days?

Do investors (at least a plurality of them) tend to become more optimistic around U.S. presidential inauguration days, focusing on favorable changes for the coming four years and thereby pushing stock prices up? To investigate, we analyze the historical returns of the Dow Jones Industrial Average (DJIA) from five trading trading days before inauguration day through five trading days after inauguration day. Using historical inauguration dates since 1929 and daily closing levels of DJIA for October 1928 through December 2008 (20 inaugurations), we find that:

We exclude from the sample the inauguration of 1933. The New York Stock Exchange shut down for several days after inauguration day in 1933 because of the mandatory national bank holiday initiated immediately after that date.

The following chart shows the average daily DJIA returns from five trading days before (-5) through five trading days after (+5) inauguration days for 1929-2005, with one standard deviation variability ranges. Day 0 is inauguration day. When inauguration day is on a Saturday, we include no returns for that day. The mean daily return for all trading days in the sample is 0.02%. Results on average suggest abnormal strength three to four days before inauguration day and weakness from two days before through inauguration day. Volatility on average tends to be high the day before inauguration and low on inauguration day. As usual for daily data, noise generally dominates signal. Sample size is small.

Does persistence in the pattern over time support belief in it?

The next chart compares the average daily DJIA returns from five trading days before through five trading days after inauguration days over the first (before 1970) and second (after 1970) halves of the sample period. This chart has no error bars and uses a finer vertical scale than the preceding chart. The patterns for the subperiods are similar, supporting belief in the reliability of the abnormal returns.

Does the party assuming power matter?

The final chart compares the average daily DJIA returns from five trading days before through five trading days after inauguration days for inaugurations of Democratic (D) and Republican (R) Presidents. Patterns suggest stronger investor reactions to Republicans taking power than Democrats.

In summary, best guess is the U.S. stock market will show first relative strength and then relative weakness in the week preceding presidential inauguration days (less so for Democrats). The week after inauguration tends to be quiet.

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