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.
Stock Market and the National Election Cycle November 7, 2011
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 October 2011 (over 61 years and 15 presidential terms) and focusing on “political quarters” (Feb-Apr, May-Jul, Aug-Oct and Nov-Jan), we find that: More…
Do Investors Care About “the Way Things Are Going”? August 16, 2011
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 level and 12-month trailing price-earnings ratio (P/E) to response of the public to the recurring Gallup polling the question: ”In general, are you satisfied or dissatisfied with the way things are going in the United States at this time?” Using Gallup polling results from PollingReport.com and contemporaneous S&P 500 Index and 12-month trailing S&P 500 operating P/E data for January 1998 through July 2011 (181 polls, roughly monthly but with some gaps), we find that: More…
War and Stock Market Returns June 8, 2011
Do equity markets respond predictably to the probability and fact of war? In their May 2011 paper entitled “The War Puzzle: Contradictory Effects of International Conflicts on Stock Markets”, Amelie Brune, Thorsten Hens, Marc Rieger and Mei Wang relate U.S. stock market returns to the estimated likelihood of war involving the U.S. as evidenced by analysis of news (key word counts in the New York Times, with one of the key words being “war”). They consider the six wars most costly to the U.S. since World War II (World War II, Korean War, Vietnam War, Gulf War, Iraq War and Afghanistan War). They distinguish between wars that have obvious preludes and wars that surprise (with the Korean War the paradigm for the latter). Based on availability of multiple measures of probability of war, they use the onset of the Iraq War during late 2002 through early 2003 to benchmark the stocks-war relationship. Using New York Times news reports during the selected wars and contemporaneous levels of the S&P 500 Index and the Dow Jones Industrial Average, they find that: More…
Exploiting the Presidential Cycle and Party in Power April 6, 2011
Are there reliable ways to exploit differences in asset class returns under Democratic and Republican U.S. presidents? In his April 2011 paper entitled “Is the 60-40 Stock-Bond Pension Fund Rule Wise?”, William Ziemba examines relationships between the U.S. presidential election cycle and long-run returns for several asset classes. Specifically, he investigates the differential performance of large capitalization stocks, small capitalization stocks and bonds when Democrats and Republicans hold the presidency. Using annual asset class return data for 1998 through 2010 to extend prior calculations for 1937-1997 and 1942-1997, he finds that:
Party Composition in Congress and Stock Returns November 2, 2010
The U.S. Democratic and Republican political parties arguably exhibit persistently different policy inclinations that affect the aggregate performance of public companies and therefore the U.S. stock market. “Party in Power and Stock Returns” investigates annual stock returns for different combinations of the party in control of the the Presidency, the House of Representatives and the Senate on a binary basis (Democrat or Republican). Do future stock market returns vary systematically with party composition and change in party composition of Congress? To investigate, we relate Republican composition of the House and Senate and prior session-to-session change in Republican composition to U.S. stock market returns during the session. Using party representation in Congress and stock index data for the Shiller data set since 1871, the Dow Jones Industrial Average (DJIA) since 1929 and the S&P 500 Index since 1951, we find that: More…
Party in Power and Stock Returns October 14, 2010
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 2009 (60 years), we find that: More…
A Few Notes on Capital Rising July 12, 2010
In their June 2010 book Capital Rising: How Capital Flows Are change Business Systems All Over the World, authors Peter Cohan and Srinivasa Rangan mine lessons from 47 case studies to “describe the phenomenon of capital flows, present new ways to think about what causes them to rise and fall, and describe ways that our readers can profit from this framework.” Specifically, in Chapter 7 (“Implications for Capital Providers”) they argue “that analyzing a country’s EE [Entrepreneurial Ecosystem] is essential for capital providers to maximize investment returns” and provide a six-step methodology to “help capital providers to sniff out the best opportunities…” The six steps are: More…
How Rigorous is the Stock Trader’s Almanac? October 12, 2009
A reader asked: “I am curious how reliable some of the factors referenced in the Stock Trader’s Almanac are, but I see no reference to it on your site. Could you review the book and/or the primary strategies in the book? I would be curious to have your perspective on how rigorous its analysis is.” More…
Regulatory Activity and Stock Returns July 2, 2009
How does the U.S. Securities and Exchange Commission’s (SEC) level of spending relate to U.S. stock market returns? Are expenditures reactive, growing after bear markets? Does higher spending boost investor confidence and subsequent stock returns? To investigate, we relate SEC outlays and the S&P 500 Index by federal fiscal year (October through September). Using agency outlay data for fiscal years 1990 through 2010 (estimates for the final two years) and S&P 500 closes for fiscal years 1986 through 2008, we find that: More…
Do Investors Prefer an Idle Congress? June 18, 2009
“When Mr. Smith Goes to Washington, Sell!” summarizes research finding that the U.S. stock market generates higher and less volatile when Congress is not in session. Is this finding robust to inclusion of recent data? To check, we examine average daily returns when the U.S. Senate is in session and out of session based on open-to-open market data (for alignment of daily Senate activity to potentially related daily trading). Using Senate in session data, party in power data and daily opening levels of the S&P 500 Index for 1978 through 2009 (partial through June 12), we find that: More…
