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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.

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

War and Stock Market Returns

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: Keep Reading

Exploiting the Presidential Cycle and Party in Power

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: Keep Reading

Party Composition in Congress and Stock Returns

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: Keep Reading

A Few Notes on Capital Rising

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: Keep Reading

How Rigorous is the Stock Trader’s Almanac?

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.” Keep Reading

Regulatory Activity and Stock Returns

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: Keep Reading

Do Investors Prefer an Idle Congress?

“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: Keep Reading

“It’s the P/E, Stupid!”

Is there a relationship between investor risk-aversion, as indicated by the aggregate U.S. stock market price-earnings ratio (P/E), and level of public satisfaction with the performance of the President? In their December 2008 paper entitled “Speculating on Presidential Success: Exploring the Link between the Price-Earnings Ratio and Approval Ratings”, Tomasz Wisniewski, Geoffrey Lightfoot and Simon Lilley examine the relationship between aggregate stock market P/E and the surveyed level of public approval of the current President. Using quarterly P/E for the S&P Composite Stock Price Index derived from Robert Shiller’s long-run dataset and Gallup presidential approval survey data from the beginning of 1950 through the third quarter of 2007 (231 observations), they conclude that: Keep Reading

Spectral Analysis of Stock Market Cyclicality

Are there reliable periodicities in U.S. stock returns tied to national election cycles? In their October 2008 paper entitled “Financial Astrology: Mapping the Presidential Election Cycle in US Stock Markets”, Wing-Keung Wong and Michael McAleer apply spectral analysis to identify and quantify cycles in U.S. stock market returns, including a presidential election cycle. Using weekly S&P 500 index data for the period 1965-2003, they conclude that: Keep Reading

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