The United States’ stock market is a strong market. A capital market becomes informational efficient when the prices of a stock is a full reflection of the available information. An addition of a new information to the market, especially in an efficient market, its effect gets incorporated instantly in the share prices and no one can make atypical returns based on either better understanding or a prior knowledge of details related to the presidential election. A number of factors, internal and external, can result in changes in the stock market. In today’s world, the financial outlook has dramatically changed, in that the financial decision has been replacing models which are quantitatively complex. This is to say that markets adjust quickly depending on changes hence the markets come to equilibrium which proves that stock markets are priced efficiently. The Efficient Market Hypothesis (EMH) states that stock prices reflect available information at any given time. It why this paper analyzes the impact the presidential election has on the U.S. stock market.
In order to get an in-depth idea of the relationship between the presidential election and the stock market, we came with five variables other than the market index to measure how each independent variable affects the stock market and the presidential terms. These variables are S&P 500 index, Party of the President, Federal interest rate, Construction Spending, Recessionary Times and Presidential Approval rating. These variables will allow us to measure what effect each of them has on the markets and the correlations each has on Presidential terms. To get enough information for each variable, we used data gathered from the year 1970-2017.
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We decided on S&P 500 based on its methodology and the diverse constituency which was a notch above other business cycle indicators such as Nasdaq Composite and Dow Jones Industrial Average. Consequently, the S&P 500 is made up of the top 500 companies listed in common stocks such as the New York Stock Exchange, unlike Dow Jones Industrial Average which has a handful of companies. The S&P 500 helped us get a clear representation of the stock market. Through the S&P 500, we were able to get an in-depth of the country’s macro-economy status which would be vital in the amount of play to be reflected in our results.
The presidential election cycle is also analyzed in our paper. As stated in our substitute hypothesis, there is a correlation with the presidential cycle in terms of the first year to the final year of their term. Ideally, we also found it prudent to analyze the systematic relationship that exists between the president’s party and the stock market. The market returns when the Republican is in power versus when the Democrats are in power. In addition, this paper seeks to examine which candidate between the Democrat and Republican they will prefer for economic prosperity.
The federal interest rate is the next variable that we examined in this paper. The impact of interest rates during the presidential elections cannot be underestimated as it determines how expensive it is to borrow money. With low-interest rates, we might have a robust economy as more people will be encouraged to take up loans which they would use to start businesses whence ignite the entrepreneurial spirit across the country. The United States has witnessed a cap of interest rates which was as a result of the Great Recession witnessed between 2008 and 2009. However, this was not the case on the late 1970’s and early 1980’s thus we wanted to see how federal interest rates affected the S&P 500 and whether the presidential cycle had any effect on interest rates.
The next variable we thought would be of importance to look at was housing market condition in the United States. Housing is an indication that people are able to get a mortgage, the confidence they have on the president and the party in charge. For example, when Donald Trump was elected president, there were expectations of a boom in the real estate sector. The housing market is tied to the interest rate. We settled on construction spending as a metrics to measure the housing market. This is because we believed we will have an idea of the construction spending on new houses. As we observed, the housing market is in a recession when interest rates are either high or people have little or no confidence in either the president and his party or the economic policies.
Going with the changes witnessed across the world such as lowering of trade barriers, technological advances, and demographic shifts, we saw it viable to add recessionary times as another dummy variable in the regression. Since the year 1970, the U.S. has witnessed six recessions, with that of 2008-2009 being the worst. This variable also affects the other variables and may have correlations than previous variables discussed in this paper in regards to fiscal policy with interest rates and construction spending among others. The recessions have demonstrated trying times in the economic state of the United States, thus the reason why we discussed in this paper to find out whether the presidential terms had anything to do with these recessions and the unprecedented economic situation we face as a country as well as the stock market.
To end with, we chose to evaluate the impact presidential approval ratings have on the stock market. It is without a doubt that a higher presidential rating means a better return on the S&P 500 since the citizens will be in support of the policies the incoming government hopes to implement. We hoped that this variable will correlate with construction and recessionary times since we believe high approval ratings means confidence of citizens to the financial path the country will take.
