Blog - Investing Notes

Blog Synthesis: Politics and the Stock Market

It is plausible to assume that political winds might sway the economy and therefore asset markets. To what degree do politics matter for equity investors? Should they worry about the philosophy of the party in power or unusual market behavior around elections? Should they act on the prognostications of political experts? Here is a listing of past blog entries on relationships between politics and the stock market:

Any Investor Response to Presidential Polling Data? ...limited evidence indicates that daily presidential election polling data do not affect the aggregate trading behavior of equity investors.

Visualization of the Stock Market Across the Typical Presidential Term ...there is some evidence to support a belief in three phases of the U.S. stock market across the typical presidential term: (1) flat at the beginning; (2) strongly advancing in middle; and, (3) moderately advancing at the end. However, the data span a small sample of presidential terms, so confidence in this view is low.

Monthly Returns During Presidential Election Years ...there is some evidence that the U.S. stock market is unusually weak (strong) during January-May (June-December) of presidential election years.

Presidential Politics and Industry Returns ...evidence does not support a belief that investors can generate excess returns using an industry allocation strategy based on U.S. presidential politics. Equity return anomalies based on party holding the presidency and presidential term year are marketwide phenomena.

The Stock Market and the National Election Cycle ...there appear to be both long-term and short-term connections between the U.S. national election cycle and stock market performance, with presidential term year 3 (1) the best (worst) and a tendency for a brief election-time rally. However, the subsamples for presidential term year analysis are very small, so confidence in related tendencies is very low.

Political Influences on Stock Valuation Levels ...U.S. stocks tend be be most overvalued under Democratic Presidents, under popular Presidents, during election years and during years when no new major military conflicts start.

Left Versus Right Down Under ...investors should perhaps lean toward stocks (real estate) when the electorate leans to the right (left).

The Political Contribution Effect ...investors might want lean toward companies that contribute to lots of political candidates (especially Democratic candidates for the House of Representatives).

Follow-up on Media Coverage of Economic News ...a reader-initiated follow-up to A Republican Risk Premium?

A Republican Risk Premium? ...a pro-Democrat/anti-Republican bias in the mainstream media may affect the economic risk perception of some investors/potential investors, thereby affecting stock valuations.

Left or Right, and Up or Down ...economic activity generally transcends politics in politically free societies.

Do Investors Care About "the Way Things Are Going"? ...there is no significant relationship between public sociopolitical satisfaction and investor behavior. Making money on equity investments is independent of "how things are going."

Expert Political Judgment: How Good Is It? How Can We Know? (Chapter-by-Chapter Review) Making the very small leap that these insights apply also to experts in economics and financial markets, we offer here a chapter-by-chapter review of the insights in this book:

When Mr. Smith Goes to Washington, Sell! ...stock market returns and volatility reflect investor uncertainty regarding the likelihood and nature of Congressional activity. This effect is economically significant.

In summary, election cycles may have actionable implications for investors/traders related to political positioning and news flows. If anything, investors prefer a do-nothing, no-surprises political environment.