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Hope for Stocks Around Inauguration Days?

Posted in Calendar Effects, Political Indicators

Do investors swing toward optimism around U.S. presidential inauguration days, focusing on future opportunities? Or, does the day remind investors of political uncertainty and conflict? To investigate, we analyze the historical returns of the Dow Jones Industrial Average (DJIA) around inauguration day. Using historical inauguration dates since 1929 (22 inaugurations) and contemporaneous daily closing levels of DJIA through January 2013, we find that:

We exclude from the sample the inauguration of 1933, leaving 21 observations. 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 average daily DJIA returns from three trading days before (-3) through three trading days after (+3) inauguration day for the full sample, with one standard deviation variability ranges. The stock market is closed on four inauguration days (Day 0), leaving only 17 observations for that day. The average daily return for all trading days in the sample is about 0.03%.

Results on average suggest that investors tend to be pessimistic on inauguration day, with an abnormal level of disagreement. However, the sample is small, and noise dominates signal.

To check the reliability of findings, we look at three pairs of subsamples.

djia-returns-around-inauguration-days

The next chart compares average daily DJIA returns from three trading days before through three trading days after inauguration day over the first 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. Results suggest that weakness on inauguration day is a recent anomaly, though perhaps representing a compression of prior behavior.

Subsamples are very small for inference.

Does the party assuming power matter?

djia-returns-around-inauguration-days-subperiods

The next chart compares the average daily DJIA returns from three trading days before through three trading days after inauguration day for inaugurations of Democratic (D) and Republican (R) Presidents, with 11 and 10 observations, respectively. Results confirm weakness on inauguration day, but are otherwise noisy.

Again, subsamples are very small.

Does it matter whether it’s the beginning of a first or second term?

djia-returns-around-inauguration-days-parties

The final chart compares the average daily DJIA returns from three trading days before through three trading days after inauguration day for first-term and second-term inaugurations, with 12 and 7 observations respectively. Results suggest that first-term (second-term) inaugurations emphasize uncertainty (certainty).

Again, subsamples are very small.

djia-returns-around-inauguration-days-terms

In summary, best guess is the U.S. stock market will be relatively weak on the upcoming first-term presidential inauguration day.

Cautions regarding findings include:

  • As noted, any return anomaly is small compared to return variability, so experience by event varies widely.
  • To the extent that the distribution of daily DJIA returns is wild, interpretation of the average return and standard deviation of returns breaks down.
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