Political Indicators

It is plausible that political winds might sway the economy and therefore financial 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 relative to elections? Should they act on the prognostications of political experts? These blog entries address relationships between politics and the stock market.

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Do Investors Care About “the Way Things Are Going”?

Are broad measures of public sociopolitical sentiment relevant to investor behavior? Do they have predictive power for stock returns as potential indicators of exuberance and fear? To investigate, we relate both U.S. stock market return and 12-month trailing S&P 500 price-earnings ratio (market P/E) to the percentage of respondents saying “yes” to the recurring Gallup polling question: “In general, are you satisfied or dissatisfied with the way things are going in the United States at this time?” Since individual polls span several days, we use S&P 500 Index levels for the first or second day of the polling interval. To calculate market P/E, we use current S&P 500 Index level and the most recent quarterly aggregate operating earnings value that is at least one month old. Using Gallup polling resultsS&P 500 Index levels and 12-month trailing S&P 500 operating earnings as available during February 1979 through October 2013 (294 polls, often unevenly spaced), we find that: Keep Reading

Stock Market and the National Election Cycle

Many stock market experts cite the year (1, 2, 3 or 4) of the U.S. presidential term cycle as a useful indicator of U.S. stock market returns. Game theory suggests that presidents deliver bad news immediately after being elected and do everything in their power to create good news just before ensuing biennial elections. Are some presidential term cycle years reliably good or bad? If so, are these abnormal returns concentrated in certain quarters? Finally, what does the stock market do in the period immediately before and after a national election? Using S&P 500 Index data from January 1950 through May 2013 (over 63 years and 15 presidential terms) and focusing on “political quarters” (Feb-Apr, May-Jul, Aug-Oct and Nov-Jan), we find that: Keep Reading

Divided Government Risk Premium?

Do investors demand a risk premium for divided government because of the policy uncertainty of gridlock? In the April 2013 preliminary draft of their paper entitled “Divided Governments and Asset Prices”, Elvira Sojli and Wing Wah Tham„ investigate the effect of divided government on asset prices by comparing U.S. stock market performance in years of divided and undivided government. They define divided government (in the U.S.) as one party holding the Presidency while the other controls one or both houses of Congress. To isolate the effects of divided government, they account for the states of four variables widely used to predict stock market returns: dividend-price ratio; credit default spread, the difference between BAA and AAA corporate bond yields; term spread, the difference between 10-year U.S. Treasury note and 3-month U.S. Treasury bill (T-bill) yields; and, deviation of the 3-month T-bill yield from its one-year moving average. To determine causality, they investigate stock market futures reactions to betting market predictions of divided versus undivided government during four election nights. Using monthly U.S. stock market returns, data for the four stock return predictors and U.S. Treasury bill yields during 1926 through 2011 (encompassing 43 elections resulting in 23 undivided and 20 divided governments), and high-frequency election outcome betting data (from Intrade) and U.S. stock market futures on biennial election nights during 2004 through 2010, they find that: Keep Reading

Hope for Stocks Around Inauguration Days?

Do investors tend toward optimism around U.S. presidential inauguration days, focusing on future opportunities? Or, does the day remind investors of political conflict? To investigate, we analyze the historical returns of the Dow Jones Industrial Average (DJIA) around inauguration day. Using historical inauguration dates since 1929 (21 inaugurations) and contemporaneous daily closing levels of DJIA through January 2009, we find that: Keep Reading

A Few Notes on Trade the Congressional Effect

Eric Singer, manager of the Congressional Effect Fund (CEFFX), introduces his 2012 book, Trade the Congressional Effect: How to Profit from Congress’s Impact on the Stock Market, by stating: “This book provides a new, empirically objective way to understand day by day what our government takes away from all of us. It shows in hard numbers what we lose out of our wallet when Congress acts. …this book suggests concrete investing strategies to make Congress’s systemic dysfunction work for you, and to hedge the risk and damage that Congress so casually and relentlessly inflicts on your life savings as represented by your portfolio and your house.” Using examples of legislative intervention and focusing on the daily level of the S&P 500 Index (capital gains only) during 1965 through 2011, he concludes that: Keep Reading

Monthly Returns During Presidential Election Years

Do the hopes and fears of presidential elections in the U.S. affect the “normal” seasonal variation in monthly stock market returns? To check, we compare average returns and volatilities (standard deviations of returns) by calendar month for the Dow Jones Industrial Average (DJIA) during years with and without quadrennial U.S. presidential elections. As a robustness check, we also check years with and without biennial U.S. congressional elections. Using monthly closes for the DJIA over the period October 1928 through October 2012 (about 84 years and 20 presidential elections), we find that: Keep Reading

Any Investor Response to Presidential Polling Data?

Do U.S. stock market returns have any connection to presidential election polling data? In other words, do investors act on the survey-indicated election prospects for the two major party candidates? Presumably, investors would tend to enter (exit) stocks if they thought the candidate with policies more (less) favorable for equity valuation were gaining ground. Using daily releases of Gallup head-to-head polling data for the 2008 presidential election (Obama-McCain for March 11 through November 2) and the 2012 presidential election (Obama-Romney for April 15 through October 16) and contemporaneous daily closing levels of the S&P 500 index, we find that: Keep Reading

TOTM Interaction with National Elections

A subscriber asked how distinct the U.S. election rally (last chart in “Stock Market and the National Election Cycle”) is from the turn-of-the-month effect for October and November (fourth chart in “Turn-of-the-Month Effect Persistence and Robustness”). To investigate, we compare turn-of-the-month (TOTM) returns by calendar month for even (national election) years, odd years and presidential election years. Consistent with prior analyses, we define TOTM as the interval from the close five trading days before to the close four trading days after the last trading day of the month (a total of eight trading days, centered on the monthly close). Using daily closes for the S&P 500 Index during February 1950 through August 2012 (62.5 years), we find that: Keep Reading

Party in Power and Stock Returns

Past research relating U.S. stock market returns to the party holding the Presidency mostly concludes that Democratic presidents are better for the stock market than Republican presidents. However, the President shares the power conferred by the electorate with Congress. Does historical data confirm that Democratic control of Congress is also better for stock market returns than Republican control of Congress? Is control of the smaller Senate more decisive than control of the House of Representatives? To check, we relate annual U.S. stock market returns to various combinations of party control of the Presidency, the Senate and the House of Representatives. Using party in power data and annual levels of the S&P 500 Index for 1950 through 2011 (62 years), we find that: Keep Reading

Election Season Stock Market VIX Drivers

Does political drama take over as the principal driver of U.S. stock market implied volatility during election seasons? In their March 2012 paper entitled “U.S. Presidential Elections and Implied Volatility: The Role of Political Uncertainty”, John Goodell and Sami Vähämaa compare the effects of political uncertainty to those of eight other sources of uncertainty on implied stock market volatility (as measured by VIX) during U.S. presidential election campaigns. They define the quadrennial campaign interval as the time from the beginning of February to the beginning of November of election years. They consider two measures of political uncertainty derived from the Iowa Electronic Markets: monthly change in probability of success of the eventual winner; and, monthly change in a measure of how close the race is. They also consider eight competing financial and economic sources of uncertainty as listed below. Using monthly data for these ten variables during the presidential election campaigns of 1992, 1996, 2000, 2004 and 2008 (40 total monthly observations), they find that: Keep Reading

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