Political Indicators

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: More…

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: More…

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: More…

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: More…

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 September 2012 (over 62 years and 15 presidential terms) and focusing on “political quarters” (Feb-Apr, May-Jul, Aug-Oct and Nov-Jan), we find that: More…

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: More…

Does measurable uncertainty in government economic policy reliably predict stock market returns? To investigate, we consider the Economic Policy Uncertainty (EPU) Index, introduced by Scott Baker, Nicholas Bloom and Steven Davis and constructed “from three types of underlying components. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty.” Using monthly levels of the EPU Index and the S&P 500 Index during January 1985 through May 2012, we find that: More…

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: More…

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: More…

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…