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Richard Byrd

Charles Douglas

UWRT 1103-010

26 April 2017

How do Presidential Elections Affect the Stock Market?

On March 8, 1817, the New York Stock Exchange (NYSE) opened for the first time, thus

becoming the first stock exchange in the United States. Today there are many stock exchanges.

The three biggest exchanges in the United States are the New York Stock Exchange, National

Association of Securities Dealers Automated Quotation System (Nasdaq), and the American

Stock Exchange (AMEX). The exchanges are where people go to buy, sell, or trade pieces of

stock. These exchanges and others such as the S&P 500 and the Dow Jones Index are put

together to make up the stock market.

The stock market as a whole can fluctuate greatly. In order to successfully profit from the

stock market, it is important to understand different factors that affect what the market does. By

predicting when a fluctuation may occur, the chances of making money become greater. Many

people think presidential elections and election time can greatly influence the stock market and

cause price fluctuations. According to a theory used by Ray Sturm, the markets rise or fall

substantially the three days following a presidential election based on the electees approval or

disapproval ratings (55). These approval ratings are based on the prediction of the incoming

president's ability to vitalize the economy. The formulas making up Sturms theory were used

with data covering 29 elections from 1896-2011. They all showed close to the same results with

a three-day spike going up or down based on approval ratings.

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Personally, I think the evidence presented in Mr. Sturms paper is too great to ignore.

Being able to predict a major price swing following an election can be a huge advantage when it

comes to betting on the stock market. This phenomenon also occurred the days following

President Obamas election. The day after Obamas election in 2012, the S&P 500 dropped

2.37% with a drop of another 1.22% on the second day after (Sturm 56). To test Sturms theory, I

looked to the latest presidential election of Donald Trump. I compared his approval rating with

what the market did. The S&P 500 hit its fourth lowest point of 2016 on November fourth. It

rose 1.74% by the day of the election. The two days following the election, the index rose 6.7%

and only dropped .14% on the third day for a total gain 6.56% within the three day period. Today

the S&P 500 continues to grow and is at an all time high despite Trump having an approval

rating fluctuating only in the 40s.

This finding makes me question Sturms theory considering Trump has very low approval

ratings and yet the S&P 500 went up. To make sure I wasnt being biased and only looking at the

S&P 500, I also looked at charts of the NASDAQ and the NYSE. Both of these indexes also

performed almost identical to the S&P 500 with all three having low points on November 4,

2016, and going up to new highs ever since. My disbelief of Sturms theory is backed up by a

newspaper article written by Henry Ong and published by the Philippines Daily Inquirer.

The article argues that instead of a rise or fall directly following an election based on the

winner, that there is a two-year election cycle that takes place in the stock market. According to

Ong, the cycle takes place no matter who or what party wins. The cycle is described as a

two-year turnaround. The cycle means right after a presidential election occurs, the markets

fall and continue to go down for the first year of the presidency due to uncertainty. The cycle
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then predicts that after the first year is over, the markets will start to go back up and continue to

go back up throughout the remainder of the presidency (Ong 1).

Although this theoretical cycle sounds good, I was still skeptical of it. In order to see for

myself, I analyzed the markets during the years of the last four elections. Starting with Clinton to

Bush to Obama, and onto Trump. Of these four elections, The only election where the cycle

applied was Bushs first election in 2001. To my surprise, Bushs reelection year was completely

opposite of the cycle. The first two years went up and the last two plummeted. Markets rose all

throughout Clintons presidency and only started to dip towards his last year. The markets

dipped the first few months of Obamas presidency but rose steadily throughout the rest of his

terms. So far the markets have done nothing but rise during Trumps administration.

Considering this information, I do not believe the two-year turnaround cycle is a good,

accurate way to predict the markets. I think if it was a good prediction tool then it would've

applied to more than once out of the last seven elections. With Sturms theory and the two-year

turnaround cycle being disproven, I turned my attention to an article about a four-year trading

cycle and market performance during Republican versus Democratic Administrations.

According to Roger Huang, investors bring in a larger return when they rotate their

investments (58). Huang states that trading bonds such as Treasury Bills are safer and provide a

larger return during years one and two of a presidency. While trading common stock is safer and

yields higher returns during years three and four of the presidency (58), This type of cycle

trading keeps investors changing how, when, and what they trade. I think it is important to be

able to recognize that investors do not constantly trade the same way.
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I also thought that while the cycle trading is taking place that there might be different

cycles or larger returns based on the party that wins office. I discovered that in his studies,

Huang notes that although the Republican party is seen as the more business savvy party, returns

for investors using the cycle pattern are generated while both parties are in office. While average

returns during Democratic administrations have been slightly higher than that of the Republican

average, the difference was not major (Huang 58).

To dig a little deeper into the subject of parties affecting the market, I looked into an

article that compares market prices the day after an election based on which party won. Victor

Niederhoffer, Steven Gibbs, and Jim Bullock found that the average change in the Dow after a

Republican win was 1.12% and was -.81% the day after a Democrat won (111). When looking

at a month after an election the Republicans had an average change of 1.30% while Democrats

had a change of -1.13% (111).

To test if this trend has happened within the last two elections I looked at the charts. I

found that the day after Trump (Republican) won the presidency that the Dow rose 3.04% and

went down 1.74% the day after Obamas (Democratic) 2012 election. Although there was a

difference in the markets actions relating to the parties, the difference was not major as stated by

Roger Huang.

To further back up the position that markets are affected but the party does not have a

major effect, I went to a professional. I got a chance to talk to Thomas Vencen. Mr. Vencen is a

financial analyst and planner and was very insightful when it came to the topic. Through Mr.

Vencen, I learned that presidential elections do have the power to created price swings within the

stock market. He said this is due mostly because elections can bring uncertainty to investors, and
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when investors are uncertain, they pull out or put more in, thus, causing the markets to fall or go

up. With that being said, it seems to me it would be hard to predict just how much it will go up or

down. Vencen also said there are many factors that can contribute to this such as major power

swings like the one that just occurred with President Trump. I think with two completely new

administrations battling for power, as was just the case, uncertainty is sure to set in and created

movement. With the major shift to a mostly Republican-ruled executive and legislative

branches, there was no telling how the market would react or which way.

When asked about the markets reacting to a Republican win, Vencen supported the idea

of higher market returns with a Republican nomination at first but thinks that overall it will

probably have the same overall outcome in the end. This supports the idea that the winning party

only affects the markets for a short time due largely to uncertainty. This also supports Henry

Ongs statement that the prices bounce due to uncertainty and that the winning party does not

matter as much in the long run while showing Roger Huangs long-term cycle trading is

effective.

Through my research, I have concluded that presidential elections do affect the stock

market. It seems the major effects only last only for a few days to a month or two after an

election. These price swings are caused by investor uncertainty, transfers of power, and for a

short time the winning party. Since there seems to be no major, distinctive difference between

the parties when it comes to overall returns of cycle trading, I think it is a safe way to trade after

the initial fluctuation up or down, no matter what party wins. In the end, there is still no real way

to accurately predict the future of the stock market as anything can happen at any time.
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Works Cited

Gallup, Inc. "Presidential Approval Ratings -- Donald Trump." Gallup.com. N.p., 02

Mar.

2017. Web. 26 Apr. 2017.

"How Do Presidential Elections Affect the Stock Market?." Philippines Daily Inquirer,

24 Feb.

2016. EBSCOhost,

librarylink.uncc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true

&db=n

5h&AN=96XFPDI20160224.00080.2&site=ehost-live&scope=site.

Huang, Roger D. Common Stock Returns and Presidential Elections. Financial

Analysts

Journal, vol. 41, no. 2, 1985, pp. 5861., www.jstor.org/stable/4478822.

Niederhoffer, Victor, et al. "Presidential Elections and the Stock Market." Financial

Analysts

Journal, vol. 26, no. 2, Mar/Apr70, pp. 111-113. EBSCOhost,

librarylink.uncc.edu/login?url=http://search.ebscohost.com.librarylink.uncc.edu/lo
gin.asp

x?direct=true&db=bth&AN=6921018&site=ehost-live&scope=site

STURM, RAY R. "Does the Market's Vote Count? The Informational Content of

Post-Presidential Election Returns." Journal of Wealth Management, vol. 16, no.

4,e

Spring2014, pp. 55-64. EBSCOhost,

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