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 9 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.


  1. Mike Ferri

    I thought you might like to read my article: “The
    Response of US Equity Values to the 2004 Presidential Election,” by Michael
    G. Ferri, Journal of Applied Finance; Spring 2008; 18, 1; pg. 29 and ff. This is one passage in the paper:
    “On November 3, after Bush emerged the
    surprising winner, the aggregate market and the equity indexes of almost all industry groups posted percentage increases in value. In this paper, I examine whether the returns of these indexes on that day were unusually large by comparison with their own typical movements. The reason these returns might be especially informative about the potential impact of elections on share prices is that Bush’s victory was – as trading data of a major prediction market show – *substantially unexpected* when stock markets closed on November 2, Election Day. Since no other unanticipated event of political or economic impact occurred between then and the closing bell of November 3, the percentage increases in equity values necessarily represent undiluted measures of investors’ response to the surprise or “shock” of the
    election’s outcome.”
    Best, Mike

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