A Fresh Look at Link Between Politics, Investing

Studying the election cycle and the stock market isn't new, but that doesn't stop inquiring minds from taking a fresh look at the numbers. CXO Advisory Group offers yet another perspective, albeit with middling results. As this research concludes:

"..there appear to be both long-term and short-term connections between the U.S. national election cycle and stock market performance, with presidential term year 3 (1) the best (worst) and a tendency for a brief election-time rally. However, the subsamples for presidential term year analysis are very small, so confidence in related tendencies is very low."

Meanwhile, a popular research paper from recent history advises that "the excess return in the stock market is higher under Democratic than Republican presidencies." Of course, that was from the vantage of 2003. Will the trend hold over the remaining years for the present incumbent? Based on the year-to-date returns so far, one might argue in the affirmative. But with the election more than three years away, a touch of modesty might still be in order.

SEI came to a similar conclusion last year, writing in a research note that "one year following [an] election, the average return of the DJIA was 2.18%. Here, the advantage goes to the Democrats, who averaged 5.43%, with the best year credited to Franklin D. Roosevelt, at 29.96% in 1944. Roosevelt also had the most negative return here; -28.68 during the first year of his first term in 1936. The average during the nine Republican administrations was -1.07%."

Of course, some think there's enough of a challenge in predicting election outcomes alone without muddying the waters with adding stock market predictions to the game. If you're of a similar persuasion, Professor Ray Fair of Yale is your man. As one of the leading academics parsing the finer points of forecasting elections, he's well versed in the opportunities and limits of quantitative analysis and politics.

Comments

[Tony Petroski:]

" Roosevelt also had the most negative return here; -28.68 during the first year of his first term in 1936."

1936 would be the last year of his first term.

Why assume that presidents have dictatorial powers. Congress has a part. Is it coincidence that the much vaunted "stimulus" that was needed so fast that Obama was going to sign it on his first day in office was timed to kick in in 2010? To the extent that the stimulus can increase nominal GDP and boost stock prices, the Democrats can take credit for any gains just before they are seeking re-election.

The conventional wisdom 25 years ago was that the market followed a 4 year cycle timed to the presidential elections. 3 years of bull market followed by a bear market of a year or year and a half. The thinking was that the president put pressure on the fed to ease monetary policy enough to produce a bull market before the election.

Sep 23 08:00 PM