Zak Baker Capstone paper
Transcript of Zak Baker Capstone paper
Baker
Introduction
Do presidents affect your portfolio? That is a question that candidates hope to not only
answer during elections but prove that they can do it better than their opponent. Contrary to
popular belief, investors are not concerned about the state of the economy, GDP, or employment.
Rather, their biggest concern is corporate earnings and which candidate can provide confidence
in strong positive earnings, explains Richard DeKaser, chief economist at National City, a
Cleveland-based financial holding company (Dan Ackman, 2004). Is there a connection between
the financial market being up on the day a candidate receives their nomination from their party
and down if that same candidate loses a debate? That is what I hope to find out. The big
questions is that with that mindset that investors have, does the stock market react to major
campaign events and allow for a prediction to be made on who will become president based off
of how the market reacts.
During election years for President the country is faced with having to make a very
important decision on who will lead the country for the next four years. It is no secret in any
election, but especially during this 2012 election, that economic policy is a vital decision maker
on whom voters will vote for come November. With the state of the economy currently and the
market volatility that exists, is there a slight bit of consistency in the market that exists? There
may just be.
No American likes to admit it but the market controls their life to one degree or another,
be it retirement, your company’s revenue, gas prices or even groceries. With such a large
mechanism that has such a large influence on society, can it be used as a predictor for president
since people control the market? The market enjoys high revenue and stability, but the variable
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that has the largest effect on the market is the government and its economic policies. By
examining the major campaign events in every election since 1960 I will look for trends to see if
the market will reflect favorability toward the candidate that eventually wins the election in
November.
Prior to Election Day, an election year has many events that take place on a very large
national scale that can influence voters. By observing the effects those events have on the
market, specifically the three major American Stock Indexes,` the Dow Jones Industrial Average,
the NASDAQ Composite Average and the S&P 500 Average, may possibly provide insight as to
who the people are favoring rather than relying solely on polls. The major events that will be
examined will be when a candidate announces they will run for election, when the running mate
is announced, when the candidate accepts the nomination from their party, the debates and
finally Election Day itself. Following such major events it will be interesting to see how the
market will react, if at all, based off of the events that candidates participate in and whether they
are favorable or not toward a certain candidate and whether that candidate wins the election
when November comes. Also, the debates are another interesting dynamic that could have an
effect on the market whether increasing confidence in a certain candidate or losing confidence
could have an effect as well when correlating the debate polls, and election polls to the market.
Similarly the overall effects of a campaign year on the market will also be interesting to see
following the major campaign events and the impact those events have on trading days. An
article by CNBC stated that, “The Standard & Poor’s 500 index has risen in the final seven
months in 13 of the last 15 presidential elections . . . And since 1896, the Dow Jones Industrial
Average has produced an average 9 percent gain during election years when an incumbent
president sought a second term — regardless of the outcome” (Schwartz, 2012). By analyzing
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these major events and the market I hope to be able to paint a picture of elections through the
workings of the stock market and use those findings to predict who will be elected president in
the 2012 election.
Literature Review
The idea of the Presidential elections and the effects that has on the stock market is not at
all new. This has been researched and analyzed by many scholars in an attempt to find patterns
and answer questions as to what truly is the effect campaigns have on the U.S. stock market.
Patterns have been found and specific cases have been studied, for example the 2000 election
and the long time to decide who actually were president and the effect that had on the market, or
how the presidential cycle affects the market. There have been many sources, but none of which
comparing major campaign events to stock market data to use as a predictor as to whom would
be elected president. The information and research provided by others provide great insight and
supplementation to my research and understanding of the relationship between the presidency
and the market.
One study aimed to show the impact of the delay in the declaration of a winner in the
2000 presidential election on the stock market. The article, “The 2000 Presidential Election and
the Stock Market,” the two authors of the article, Srinivas Nippani and W. Bobby Medlin, found
that the delay in declaring a president did in fact have a negative impact on the market. These
two professors took the time from November 7, 2000 to December 13, 2000 to analyze the
performance of the three different stock market indices during the period of the election result
delay with their performance during a pre-event comparison period (Nippani & Bobby, 2002).
What is interesting about this analysis is the uniqueness of the situation and the impact it had on
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the market. Looking at 26 trading days and then dividing them into 3 different windows of t-test
analysis because of the events that took place in each window, such as the early declarations of
the winner, and mass media coverage, legal challenges, appeals and counter appeals, and until a
winner was finally emerged (Nippani & Bobby, 2002). The results they found were that the
market reacted negatively to the delay. All three indices were negative during the delay, and
were significantly less that their pre-event means with t-values for the difference in means
significant at the 0.05 level (Nippani & Bobby, 2002). The significance of this research
demonstrates that presidential elections have an effect on the stock market, evidence supporting
my question on whether major election events do in fact have an effect on the market.
Another work is “Anatomy of an Experimental Political Stock Market.” This article
focuses on how “the market worked extremely well, dominating opinion polls in forecasting the
outcome of the 1988 presidential election, even though traders exhibited substantial amounts of
judgment bias” (Forsythe, 1992). The authors of this article examine the Iowa Presidential Stock
Market which was created in 1988 in order to predict the presidential candidates. The “prices in
that market fully reflected the available information about the election in the sense that the
market’s prediction of President Bush’s margin of victory was off by one percent” (Forsythe,
1992). This experiment examines the effects of judgment biases in the market and the effect that
that has on market values, and thus predicting the election. In the experiment traders were sold
shares of candidates at $2.50 each, given the option to either buy or sell in whichever candidate.
(Forsythe, 1992). What was found was that the Hayek Hypothesis which is that markets work
even when participants know very little about the environment or about other participants where
even polling data had little effect on market prices, though polls provide insight as to how traders
operate. (Forsythe, 1992). The significance of the experiment demonstrates the effects of
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judgment bias in the market. It can have great influence in the actual market setting and may
explain reasoning as to why the market reacts the way it does during an election year.
A more historical article dedicated to observing Democratic or Republican party’s control
of the White House and the results of the market is, “The Presidential Puzzle: Political Cycles
and the Stock Market” by professors Santa Clara and Valkanov. This work focuses on proving
which party is better for the market either Republicans or Democrats by, “conducting a careful
empirical analysis of the relation between presidential elections and the stock market” (Santa-
Clara & Valkanov, 2003). What they found since 1927 to 1998 the Treasury bill rate has been
about 2% under Republicans and 11% under Democrats. Real market returns are higher under
Democrats by more than 5% as well; interest rate being almost 4% lower and excess returns
between the two parties reaches 16% (Santa-Clara & Valkanov, 2003). Their research shows
that economic policies can impact returns, especially unexpected ones that surprise investors and
that the data can predict the outcome of presidential elections. (Santa-Clara & Valkanov, 2003).
The data and analysis of party influence and the market effects will be intriguing to see if it
shows a pattern in my analysis as well.
The uncertainty of presidential elections and the effects of stock returns and the business
cycle are substantial according to Jinliang Li and Jeffery Born of Northeastern University. In
their article, “Presidential Election Uncertainty and Common Stock returns in the United States”
found that “if the election does not have a candidate with a dominant lead, stock market volatility
(risk) and average returns rise” (Li & Born, 2006). Previous studies looked at the fact that the
outcome of the election was known, when public opinion polling says otherwise because in
“elections between 1964 and 2000 the preference for the candidates of the two major parties
within a half dozen points of each other throughout the electoral season” (Li & Born, 2006).
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Finding that a common stock rises in the three month period before the election when the
outcome is uncertain, is a link between political uncertainty and common stock return generation
(Li & Born, 2006). Also just like the previous article, they also found that Democrats had a
higher return average; more evidence that, that phenomena should be something that will come
up in my research.
The final article, “The Obama Effect,” examines the 2008 election and how the prospect
of Obama “led stock price declines and that gains by Obama were more likely to be followed by
falling stock prices than by rising prices” (Halcoussis & Lowenberg, 2009), indicating the drop
was in fact due to Obama’s success not causing Obama’s success. Essentially saying that the
recession was driven in part by his success, the evidence to prove this was the changes in stock
indices and public opinion polls. The findings showed that “an increase in the perceived
probability of a Democratic victory produced a decline in stock prices” (Halcoussis &
Lowenberg, 2009). What is interesting about these findings is that it proves information from a
previous article that certainty in an election will drive prices down, versus uncertainty. The major
variable that was not entirely mentioned in the article was that the economy was in the midst of
one of the greatest financial crisis since the great depression which was causing the market to
drop significantly during that time.
There have been several articles written on the effects of the financial market and the
presidential election, providing great insight and inspiration, as well as direction on where to take
research further on such the subject. By looking at major campaign events during elections and
based off of this research by others the results that will come should demonstrate a relationship
between the financial market and presidential elections.
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Hypotheses
1. The winner of the election will have more days where the stock market is up, on major
campaign events rather than days where the market is down.
2. The winner of the election will have more total days up, both number of up events days
and percentage of market growth when compared to their opponent.
3. Looking at public opinion polls on debates, the market will reflect the perceived winner
of the debate by having an increase or decrease depending on whether or not that
candidate was ahead or behind in polls prior to the debate and if any change was made in
the polls after the debate.
4. When a candidate announces their running mate the market will be up since the running
mate is supposed to help the candidate get elected in November
5. For the most part during a campaign, when major events occur, the market will be up,
showing that campaign events do in fact have an impact on the market.
6. If there is an incumbent running, then the market will show favorability toward him
during major election events because the market likes consistency
7. The patriotic effects of Election Day and Inauguration will cause the market to have
consistently positive returns on those days.
Methods
For all my hypotheses I will go through the data collected for the Dow Jones Industrial
Average, The NASDAQ Composite Average (started right before the 1972 election) and the
S&P 500. I will get this data from DaveManuel.com, a website on historical market data by day.
It is confirmed as reliable through cross checking it with Yahoo Finance and the results are the
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same. The bonus to DaveManuel.com is that its formatting is much easier to read and
understand. I have devised a systematic way of what days I find significant and will use those
days to compare how the stock market reacts. Specifically the key events that will be examined
in every election where available will be the day the candidates announce their candidacy, when
they receive the nomination from their party, when the running mate is announced, the debates
and finally the election and then the inauguration. Using that data, I will compile separate graphs
and tables to analyze and help to draw conclusions for my Hypotheses. For Hypothesis 2, I will
use iPoll the CNN/ORC polling data, and a document by the Langer Research Institute titled
“ABC News Memo: Do Debates Matter?” which analyzes polling changes both before and after
the debates. By observing who the public thought won the debate and where the public opinion
was at, at the time of the debate and then shortly after the debate and see if any changes that
occurred were reflected in the market.
The strengths of my methods lie in the cold hard data that is out there and form it into
tables and graphs for statistical analysis. The polling data and comparing that to debate data
(from the next day because the market is already closed when the debates go live) will be easy to
compare placing it side by side then comparing it to whether the candidate that won the debate
was ahead or behind in public opinion polls. The weakness of the data lie in the fact that some
days when events took place did not happen on weekdays, but rather weekends forcing me to
take the Monday market data in order to obtain a value for that event. Also I will have to account
for outside events that could have an effect on the market. Economic news or recession will have
to be considered in my analysis or even daily news when the market either does very well or
drops a significant amount in a single day. That way I could account for it in my final analysis
that there could be outlying events that can cause market change, not just political events since
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the market is very susceptible to such variables. That back checking will be done by looking at
the New York Times, the Wall Street Journal and any other news agencies that could provide
insight for specific events.
Presentation and Analysis
Hypothesis 1
The first hypothesis is looking at whether the winner of the election has a more days
where the stock market reacts positively following one of the major campaign events that the
candidate holds rather than more days that are down. Giving an indication that the people are
reacting in a positive sense toward that candidate’s policies and confidence toward the economy,
possibly giving an idea of the confidence that the country has in that candidate.
Examining all the data for each election since 1960 the total number of days where the
market was up following the major events of a campaign was staggering to see. In all three major
indexes the number of days where the market was up was nearly a two to one ratio when
compared the number of days down for the market was down for the winners of the election. The
following graph shows the comparison of up days and down days for election winners since
1960.
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DOW JONES NASDAQ S&P 5000
10
20
30
40
50
60
Totals for Election Winners
updown
Of all the elections, 1984 and 1972 were the only elections where the number of down days
outnumbered the number of up days for all three indexes. For 1984, the down days were all 4 and
the up days were all 3. What could account for this was the fact that the country was just coming
out of a recession at the time which could have influenced the market much more heavily than
the campaign events. While in 1972 the down days were 4 for the DOW 5 for the NASDAQ and
4 for the S&P 500 where the up days were 3, 2 and 3. The elections of 1964, 1980, 1988, 1992,
1996, 2004 and 2008 all support the hypothesis extremely clearly. 1980 had 7,8 and 7 up days
while having 2, 1 and 1 down days for the DOW, NASDAQ and S&P 500 in that order, same
with 1992, with 10 up days for all three indexes and 3 down days for all three indexes. 2000 was
close with 9,6 and 9 up days and 4,7,4 down days. The figure below shows the year by year
totals of each election and shows that the up days are greater than the number of down days for
each election with the exception of 1984 and 1972 as mentioned above.1
1 The above data was compiled by author through DaveManuel.com and Yahoo Finance.
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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DOW
JONE
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1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
0
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12up down
Hypothesis 2
This hypothesis examines not only up and down days but the percentage of increase or
decrease of the market and compares those numbers to each candidate. Where hypothesis one
focuses solely on the ups and downs of the market and just election winners this one aims to
compare the two candidates by looking at volume as well.
The following graphs demonstrate the aspect of percentage volume change in the market
compared to opposing candidates based of the significant campaign events that are supposed to
help their campaign, which are debates, the nomination, running mate selection, and announcing
to run for the presidency. A few interesting findings to note are that in nearly every election the
winner of the election has a higher overall percentage increase in the market value then their
opponent.
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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Ford Carter
-3
-2
-1
0
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Bush Dukakis
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Clinton Dole0
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Nixon Humphrey0
0.5
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The graphs above show that with the winner of the election reflects more of a percentage
increase of market change over their opponent. Nixon saw a 3.67% increae over Humphrey’s
0.96% in 1968. Bush in 1988 had a 7.49% market increase while Dukakis was in the negatives at
-3.27%. which was the same for Carter and Ford. Carter held 4.08% increase while Ford was -
1.82 in regards to market change. In 1996 Clinton had a total of 5.85% while Dole only saw a
0.74% increase. Other elections that share this trend are: 1972, 1980, 1984, 1992, and 2008. In
1972 Nixon had a total of -0.41 % but McGovern had a total of -1.05%. 1980 reagan had a
11.5% increase while carter had only 5.61%. But the elections where the opponent had a greater
positive influence were the elections of: 1960, 1964, 2000 and 2004. For those elections there are
a few “z” variables that had an effect on the market that drove it down at the time of some
specific election events. In the 2000 election, on the day after the second debate on October 11,
2000 the USS Cole was attacked and that had an impact on the market, enough to cause stocks to
plunge 9.15% in a single day, greatly effecting the outcome for George Bush’s market totals
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overall. Having -6.51% market change total while gore had 12.9% change total. If he did not
have that disaster occur he would have been much more even with Gore, from a market
standpoint on the election. As for the other elections major events that took place that would
have had significant effects on the market. For 1964 and 2004 the country was at war. Vietnam
had just began in August following the Gulf of Tonkin Resolution and the Iraq was was going
into its second year of conflict. As for 1960, there is no real large identifiable “z” variable to
account for. For those elections the candidate that did not win had a more positive impact on the
market. 2
Also when looking at the number of up days and down days side by side for each
candidate. The winning candidate usually has more up days where the losing candidate has more
down days.
Carter Reagan
-10
-5
0
5
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15
20
1980 Election
updown
Bush Clinton Perot
-10
-5
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1992 Election
updown
McCain Obama
-15
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2008 Election
updown
Clinton Dole
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1996 Election
updown
2 The above data was compiled by author through DaveManuel.com and Yahoo Finance.
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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In these graphs above are example of where the winner of the election carried more positive days
overall then the losing candidate. Demonstrating that the winner of the election typically has the
stock market reflecting their lead in the race. The other elections that showed this was 2000,
where the up days were 11 for Gore 13 for Bush and the down days were 4 for Gore and 11 for
Bush. 1988, George H.W. Bush held 19 up days to Duakis 3 while only having 6 down days and
Dukakis having 5, more down then up for him. 1984 Reagan had 9 up days where Mondale had
0. 1976, Carter had 14 up days compared to Ford’s 4 while having only 6 down compared to
Ford’s 8. Finally 1968, Nixon held 5 up days to Humphrey’s 2. The only elections where the
candidate that did not win the election had a greater number of up days then the winner occurred
in 1960, 1964 and in 1972, with Nixon having 6 to Kennedy’s 4, Goldwater having 4 to
Johnson’s 2 and Nixon and McGovern tied at 4 up days a piece.
Also when the magnitude of the stock market and the total days up and down are
compared with each other there are stunning similarities between the two. For with both methods
together provides insight as to why the other turned out to look the way that it does.
Johnson Goldwater-0.1
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Johnson Goldwater
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updown
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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Looking at the 1964 election, it is clear why Goldwater had a better magnitude, .78% up
copmared to -.02% for Johnson. But Johnson had more down, 4, days where Goldwater had zero.
Driving Johnsons’ magnitude down, lower then Goldwater. In the 1984 election below where
the data was all negative. Both Reagan and Mondale had negative magnitudes, -.9% and -5.52%,
but what put Reagan ahead was the fact that he had 9 up days. 3
Reagan Mondale
-6
-5
-4
-3
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-1
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1984 Election % change
Reagan Mondale
-15
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updown
Finally the last election to note is the similarities in the 1992 election. With Clinton being the
winner of the election it is clear that the stock market reacted favorably toward him. He was
clearly ahead of both Bush and Perot in both magnitude and the number of up days. Holding 18
total times where all three indexes were up where George H. W. Bush had 5 and Ross Perot had
7. As for Magnitudes, Clinton had a total of 8.61%, Perot held a close second at 6.7% and finally
the incumbent Bush had 3.4%. Looking at both graphs are very similar in showing the lead that
Clinton had over his opponents in both the number of times the idexes were up and the positive
change in magnitude.
3 The above data was compiled by author through DaveManuel.com and Yahoo Finance.
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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Bush Clinton Perot0
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Bush Clinton Perot
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updown
This hypothesis focused on comparing the candidates and how the market reacts to each
candidate following a major campaign event. The results that were compiled and the data
collected supports the hypothesis that the winner of the election has a more positive effect on the
market since the people operate the market and the people elect the president. Indicating that
more often then not, the market will favor the winning candidate.
Hypothesis 3
The following hypothesis focuses on the debates and whether a pattern can be seen in the
market and the polls that are taken before the debate, who won the debate or lost and the polls
after the debate. That is because since people run the market and people vote for president it will
be interesting to see if the stock market in some way mirrors the polls of the election.
Starting with the 1976 election between Carter and Ford Carter won the first two debates,
as indicated by a Gallup poll taken after the debates 37% to 23% and 57% to 19%. Following
both debates the market was also up with a total percent increase of .15% and 1.74%. Carter also
led in the polls both before the debates and after the debates with a 47%-41% lead before and a
49%-44% lead after the first one and a 47%-45% lead before and a 48%-42% lead after. What is
interesting to note is that for the third debate, Ford appears to have won that debate with a 39%-
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24% approval rating over Carter. But immediately after the debate the market was down with a
total loss of .22% with the DOW and S&P 500 both down and Carter pulled even further ahead
in the polls after the debate with a 51%-40% lead in the national polls.
Debate polls 1976 DOW NASDAQ S&P 500 Pre Debate Post Debate
Carter Ford Carter Ford Carter Ford
37 23 -0.08 0.12 0.11 47 41 49 44
57 19 0.56 0.63 0.55 47 45 48 42
24 39 -0.15 0.04 -0.11 51 36 51 40
For the 1980 and 1984 elections the data pulled from those elections are not useful for
this hypothesis for two reasons. For the 1980 election there was only one debate and thus not
enough information to conclude on that election. Though what is interesting to note was that
before the debate Reagan was down in th epolls, 39% to 47% behind Carter but after the post
debate poll that was taken, it showed that Reagan had won was the general consensus, 34% to
26% and taking the lead in the polls as well 46%-43% over Carter. But as for the market reaction
The DOW and S&P were down while the NASDAQ was up. Even though the market was down
overall Reagan still managed to pull ahead in the polls. For the 1984 election the country was
amid a recession and the overall market performance because of that was quite poor. But the
1988 election showed some interesting data based off of the two debates. For the first debate the
Gallup poll had Dukakis as the winner of that debate at 38%-29% but to note was all three
indexes were down with a total of 1.16% and Bush was ahead in the polls 51-45 before and 51-
45 after. Creating no change in the poll but the market reacted to the negative news since the
people were favoring Bush and his loss possibly effected the market, since after the second
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debate Bush won it 60%-16% and the market was up the next day across the board. The DOW,
NASDAQ and S&P 500 were all up and Bush’s approval rating went up a point to 52%-45%.
The election of 1988 shows a similar pattern as that of the previous election studied, 1976 that
debates and polls may possibly have an effect on the market. 4
Debate Poll 1988 DOW NASDAQ S&P 500 Pre Debate Post debate
Dukakis Bush Dukakis Bush Dukakis Bush
38 29 -0.26 -0.57 -0.33 45 51 45 51
16 60 0.01 0.29 0.1 45 51 45 52
The 1992 election was much different then any other election debate before or since. The
fact that there was a third party candidate and participated in the debates created an interesting
dynamic. The chart below shows the results:
Debate Poll 1992 DOW NASDAQ S&P 500 Pre Debate Post Debate
Clinton Bush Perot Clinton Bush Clinton Bush
28 28 37 0.01 0.69 0.52 49 30 43 32
58 16 15 0.44 1.38 0.79 44 37 49 31
30 16 47 1.21 0.58 1.19 49 35 45 35
During the 1992 election following the debates the market was up on every single day. Even on
the days where the third part candidate, Perot, won the first and last debates. But what is
interesting to note was that on a national level Clinton had the upper hand on the national polls
being ahead of Bush before and after every single debate. During the first debate Bush and
4 The above data was compiled by author through DaveManuel.com , Yahoo Finance, CNN/ORC Polling Data, Gallup Polling Data and Langer Research Associates.
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The following data was compiled by author through DaveManuel.com , Yahoo Finance, CNN/ORC Polling Data, Gallup Polling Data and Langer Research Associates.
The following data was compiled by author through DaveManuel.com , Yahoo Finance, CNN/ORC Polling Data, Gallup Polling Data and Langer Research Associates.
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Clinton tied but Perot had won the debate, though Clinton kept the lead in the polls 43%-32%
over Bush, even though it did drop from 49%-30% losing 6 points. The next debate Clinton had
won by a large margin with 58% of Americans polled saying he won with Bush and Perot only
getting 16% and 15%. The following day the market was up and the lead Clinton lost from the
first debate rebounded back up to 49%. At this point in the third debate, even though Perot had
won with 47%, Clinton came in second with 30% and finally Bush with 16%. What is interesting
to note is that after every debate the market was up even if a third party candidate won the debate
the candidate with the highest polling numbers, Clinton still did well in the eyes of the people.
Indicating that even if a third party candidate does well in the debate the candidate that is leading
in the overall polls, in this case Clinton, just has to do well enough to keep the confidence of the
people and the investors on Wall Street to get elected. The effect of the third party candidate
does not appear to make much of a difference in this case regarding to polling data, the market,
and debates.
The 1996 election provides even more evidence to support this hypothesis. Clinton won
both elections and led in the polls throughout the election and the market reflected positively the
following day. The table below shows the exact data and how the DOW was the only index that
was down following both debates but the overall market change was positive. Clinton won the
first debate 59%-29% over Dole with bot the NASDAQ and S&P 500. Before the debate Clinton
had a lead of 55%-38% but after the debate the the value dropped 52%-41%. Where on the
second debate Clinton won again, 51%-32% with the market values ironically being the exact
same but also moving up in the polls from 52% before to 54% after.
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Debate polls 1996 DOW NASDAQ S&P 500 Pre Debate Post Debate
Clinton Dole Clinton Dole Clinton Dole
59 29 -0.22 0.27 0.27 55 38 52 41
51 32 -0.22 0.27 0.27 52 37 54 38
The 2000 election was a very interesting election when it comes to the debates, polling
numbers and the market. No real consistencies appear to exist, which could be contributed to
how close the election was on election day for nobody really knew which candidate had a solid
lead. After the second debate the public believed that Bush had won, 36%-49% with the market
down across the board, but Bush had the lead in the polls both before and after the debate, 44%-
48%. Also after the second debate on October 12, 2000 the USS Cole (On This Day: October 12,
2012) was attacked and for that day the stock market dropped significantly for a total of 3.04%.
Then in the third debate the public believed that Gore had won, 48%-41% with the market up in
all three indexes though Bush was up in the polls 45%-51% before and 46%-51% after.
Debate Poll 200 DOW NASDAQ S&P 500 Pre Debate Post Debate
Gore Bush Gore Bush Gore Bush
46 44 -3.64 -2.96 -2.55 44 48 45 48
36 49 -1.14 -1.32 -0.58 45 48 44 48
48 41 0.6 1.95 0.55 48 46 45 48
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The following data was compiled by author through DaveManuel.com , Yahoo Finance, CNN/ORC Polling Data, Gallup Polling Data and Langer Research Associates.
The following data was compiled by author through DaveManuel.com , Yahoo Finance, CNN/ORC Polling Data, Gallup Polling Data and Langer Research Associates.
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The 2004 election was also interesting. Kerry according to the Gallup polls won every
single one of the debates. Before the debate the polls were tied but after the first debate the
market was down and Bush ended up leading in the polls. Going from tied 48%-48% to 50%-
46%. After all the rest of the debates the market was up but Bush had such a strong lead, leading
50%-46% and 51%-46% for the rest of the election the market was not largely effected by the
outcomes of the debate then already knowing that Bush most likely would remain as president
just as the polling data was showing. Unlike the 2000 election, where it wasn’t that clear at the
time just like the 2012 election.
Debate Poll 2004 DOW NASDAQ S&P 500 Pre Debate Post Debate
Kerry Bush Kerry Bush Kerry Bush
52 39 -1.08 -0.91 -0.93 48 48 46 50
47 45 0.27 0.46 0.2 47 50 46 50
53 37 1.11 2.39 1.52 45 51 46 51
The 2008 election was also in the midst of a recession much like that of the 1984 where
the country was just beginning to comeout of one. A major difference was that an incumbent was
not running and much of the blame was placed on the outgoing president, Bush. Throughout the
entire election Obama was ahead of McCain and had won every debate according to the polls.
Granted the market does not reflect the fact that the country knew fairly certainly who the winner
will be like the 2004 election, but the fact that the country was in recession must be taken into
account.
As for the 2012 election, as shown below, the data is very similar to that of the 2000
election where the debate results were close and the national polls were even closer. For 2012,
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The following data was compiled by author through DaveManuel.com , Yahoo Finance, CNN/ORC Polling Data, Gallup Polling Data and Langer Research Associates.
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Wall Street wants Romney to win the election, in a CNBC Fed Survey of Wall Street brokerage
investors. When respondents were asked who they preferred, “53 percent of respondents picked
Romney and just 18 percent chose Obama” (Liesman, 2012). Romney won the first debate and
the market was up the following day and Romney also climbed up in the polls. Obama then
proceeded to win the next two debates37%-30% and 48%-40% but the polls continued to show
Obama losing ground, 47%-47.4% in favor of Romney after the second debate and 47.1%-48%
in favor of Romney after the final debate. In the last debate the market was down and Romney
took the lead in the polls, evidence that there was beginning to be a shift in favorability from
Obama to Romney.
Debate poll DOW NASDAQ S&P 500 Pre Debate Post Debate
Obama Romney Obama Romney Obama Romney
39 49 0.6 0.5 0.7 49 45.7 48.4 47
37 30 0.04 0.1 0.4 47.3 47.4 47 47.4
48 40 -1.82 -0.88 -1.44 47.1 46.9 47.1 48
Based off of the data from the previous elections, there appears to be some evidence that
there is a correlation between the winner of the debates, the polls and how the market reacts the
following day of the debates. For the most part if the candidate that wins the debate and has the
lead in the polls the market will typically be up. But if the candidate that loses the debate but is
ahead in the poll then the market the following day will most likely be down. This phenomenon
was evident in the 1976, 1988, 1992 (even though there was a third party candidate), and 1996.
Granted there are a couple of elections where this is not the case such as the 2008 election which
the country was in recession and even though there was a clear leader in the polls the market did
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The following data was compiled by author through DaveManuel.com , Yahoo Finance, CNN/ORC Polling Data, Gallup Polling Data and Real Clear Politics.com Polling data
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not react favorably. The 2004 election was another one, there was a clear leader following the
first debate and even though the incumbent did not win any of the debates, the market was
encouraging toward Bush. Finally the 2012 election is most like the 2000 and even the 2004
election where the market is volatile and the polls are close, making a prediction of who will win
based off of this data alone very difficult.
Hypothesis 4
Hypothesis 4 focuses on the effects of the running mate announcement and any effect that
news has on the market. The idea would be that the running mate, a person that is supposed to
help the candidate running for president gets elected would have a positive effect on the market.
but from the data compiled it appears to actually have the opposite effect. The market across all
three indexes since 1972 is generally down, as shown in the tables below.
DOW JONES NASDAQ S&P 500
-10
-8
-6
-4
-2
0
2
4
6
8
Running Mate Selection and Market
updown
DOW NASDAQ S&P 500
-7
-6
-5
-4
-3
-2
-1
0
Percent of Market Change after Runningmate Announcement
The fact that the market reacted negatively so often and has such a great negative decrease in
magnitude was not expected. The fact that the running mate is supposed to aid the candidate
running for president does not appear to do so when it comes to market influence. Even after
checking on the dates and no major event occurred that would have a large effect on the market
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besides the 2008 recession, perhaps people and investors were either expecting someone else or
were let down by the choice. For example, when Sarah Palin was chosen, who ended up being a
controversial choice, every index was down for a net loss of 4.67%. When George W. Bush
announced Cheney, the market lost 3.58%. This is not just a recent occurrence either. When Ford
selected Dole, the market lost 2.6% in a single day. The only time where the market saw a gain
larger than 2% was when Clinton selected Gore with an increase of 2.92%. Based off of this
analysis it appears that the announcement of the running mate of the candidate has a negative
correlation on the market due to the number of negative days and the negative magnitude of the
market that is constistent with Vice Presidential candidate announcements.
For the 2012 election the trend that the market reacted negatively following the selection
of the running mate was not true. Instead the market reacted favorably to the announcement
being up across the board with the DOW up 0.32% the NASDAQ up 0.07% and the S&P 500 up
0.22%. This can maybe be attributed to the fact the Paul Ryan’s plan lowers taxes on the wealthy
creating only two tax brackets a 10 and 15 percent tax, eliminate taxes on investment income,
and lower corporate taxes from 35% to 25% (Temple-West, 2012). The Ryan Tax Plan is quite
favorable to those on Wall Street and aims at boosting the economy during a time when the
country is still trying to get out of a recession. Because the market is run by people and the
economy is the main focus of this election, since Ryan was announced on August 11, the polls
had Obama leading 48 to 43.4. By September 3 the polls were tied 46.4 to 46.4 (RCP Poll
Average, 2012). Even though throughout the elections since 1960 the running mate has not had a
significant effect on the market, and most often negative, Ryan seems to be an anomaly. He was
chosen like any other VP to help strengthen the ticket but in this case his economic credentials
and plans appear to help not only Romney but investors’ sentiment as well. Jack Albin, chief
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investment officer at Harris Private Bank stated that, “By and large, white-collar finance people
want to see Romney in there (the White House)” (Cooper, 2012). Romney’s choice of Ryan,
during a time when the economy was an issue appears to be helping him in the polls and gaining
the trust of Wall Street, a turnaround from previous years where the VP pick has historically seen
a negative turn in the market.
Hypothesis 5
This hypothesis focuses on the overall effects of the campaign season on the financial
market. The idea that due to the election investors will be more willing to trade due to the
economic promises each candidate will be making following major campaign events in the
election. Essentially investors will be betting on the presidency, causing trading to increase and
allowing for increases in total market revenue.
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
-4
-2
0
2
4
6
8
10
Total Percentages of Market Change by Election Year Following Major Campaign Events
DOW JONES NASDAQ S&P 500
Pe
rce
nt
The graph above demonstrates this fact that with election years the total magnitude of the
financial market has a tendency to increase following significant campaign events. Prior to 1976
the number of campaign events were less, which would account for the smaller numbers on
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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magnitude, such as no debates, and not as many media outlets and money being poured into
campaigns the market saw relatively little change. Primarily due to that small number of events
that took place. Then in 1980 there was a sudden spike when Reagan was elected. There were
also spikes in the 1992 election and the 2008 election. What is ironic about these elections were
that they came when each candidate that won was taking a stance, making the economy their
priority. Reagan, and his supply side economics plan and boost in military spending and also pull
the country out of a recession. Clinton, and his campaign slogan of it’s “the economy stupid”
when the country was in a recession and increased government spending. Finally Obama, where
the country had seen the largest recession since the Great Depression has the largest spike in
market percentage increase out of any election since 1960. The fact that these spikes occurred
not only during economic recessions but also during a political shift in the white house is also
intriguing. In 1976 Reagan, a Republican, beat the incumbent Carter, a Democrat. In 1992
Clinton, a Democrat, beat the incumbent Bush, a Republican. Finally in 2008, Obama, a
Democrat beat McCain, a Republican, on the stance that the Republicans and George W. Bush
were to blame for the economic recession and two wars the nation was in.
Out of all the elections there are only two in which the market was down for that election
year. Those years are 1972 and 1984. The 1972 results can be best explained as an anomaly in an
economic sense. A report on the U.S. economy in 1972 said that, “The Economic expansion in
1972 was broadly based and strong all year . . . with GNP in real terms up 6.5%and the industrial
production index up 7%. Employment registered one of the largest year-to-year increases on
record . . .” (Reserve, 1973). The only explanation for why the market was down was that after
the major campaign events the market was down more often than it was up. The market
fluctuates and during that election it just so happened to be down on those days. As for the 1984
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election, the economy was just coming out of the recession of 1981-1982 where, “GNP fell by
2.5% in 1982 as the unemployment rate rose above 10% . . . by early 1984 the economy
rebounded and the United States entered one of the longest periods of sustained economic
growth since World War II” (State, 2003-2012). The fact that the country was pulling out of a
recession would make sense that the total market value for that election year would be down
following such hard economic times. Out of all the elections since 1960 till 2012, having only
two where following major campaign events the market was down across the board reflects the
fact that campaign events typically have a positive effect on the market.
The table below shows the total number of days the market was up or down following a
significant campaign event from 1960 to 2012.
1960-2012 DOW JONES NASDAQ S&P 500
up 78 62 79
down 54 45 53
The totals are significant where there are a large number of up days 78, 62, and 79 showing that
typically the days after major campaign events the makret performs well. There are also not as
many days where the market was down 54, 45, and 53. What else is also interesting to note is in
the elections of 1980, 1992 1972, and 1984 the results are what would be expected,
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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DOW JONES NASDAQ S&P 5000
1
2
3
4
5
6
7
8
9
1980
updown
DOW JONES NASDAQ S&P 5000
2
4
6
8
10
12
1992
up down
DOW JONES NASDAQ S&P 5000
1
2
3
4
5
6
7
8
1984
updown
DOW JONES NASDAQ S&P 5000
1
2
3
4
5
6
1972
updown
a large number of up days over down days, relating to the spikes on the graph that showed the
magnitudes. But the election of 2008 does not look as would be expected from these previous
elections. Instead 2008, seems fairly equal on the number of up days and down days. The reason
for the spike that occurs is cause primarily due to three significant events the last debate, the
election and the inauguration. At this point the country had a strong confidence that Obama
would get elected and that his economic policies would work leading 52.9% to 45.6% over
McCain on election day (RCP Poll Average, 2012). As for the rest of the elections there are not
any significant trends to note because they match with what would be expected. The number of
up days and down days looks almost the same as the magnitude graph above.
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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DOW JONES NASDAQ S&P 5000
1
2
3
4
5
6
7
8
2008
updown
Based off of this data, it is clear that the significant campaign events that occur during an
election appear to in fact have an effect that relates to the market. For more often than not the
market is up and on elections during a big political shift a large increase in market value would
be expected. This data supports my hypothesis.
Hypothesis 6
This hypothesis focuses on the incumbents running for election and if the market will
favor either incumbents or the challenger since the market enjoys constistency and investors
know what they will be getting from the incumbent if they are elected.
What was actually found out after doing the research was that the incumbent does not
really matter at all. The data is pretty much exactly even after looking at all the elections where
the elected incumbent was running, 1972, 1980, 1984, 1992, 1996, and 2004, because those
elections match the election of 2012 because an incumbent is running. The following graph
shows that the number of total up days and down days is nearly equal from all the elections. The
only two elections that are out of the norm where the challenger had a significant number of up
days over down days and they are the elections of 1980, and 1992 where the incumbent lost.
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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Both of which were significant in hypothesis 5 as the stand out elections that had large increases
in market magnitude.
DOW JONES NASDAQ S&P 5000
2
4
6
8
10
12
14
16
18
Incumbents and the market
UpDown
DOW NASDAQ S&P 500 DOW NASDAQ S&P 500
CARTER REAGAN
0
1
2
3
4
5
6
7
1980
UPDOWN
DOW NASDAQ S&P 500 DOW NASDAQ S&P 500BUSH CLINTON
0
1
2
3
4
5
6
7
1992
UPDOWN
Incumbent Challenger0
10
20
30
40
50
60
Totals for Incumbent Elections
updown
Besides these two elections where the challenger had a much great net positive influence on the
market following major campaign events, the rest of the elections were nearly the exact same in
regards to numbers. The election of 1972 between Nixon and McGovern had the same number of
total market positives 4 (taking the total of “ups” from the DOW NASDAQ and S&P 500 and
combining them). The 1984 election showed favorability toward the incumbent with Reagan
having 9 market positives where Mondale had zero, this in one example where the market
favored the incumbent. This same instance happened in 1996 where Clinton had a total of 13
market positives and Dole had only 6. What is interesting to note about these two incumbents
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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was that they were also four years after the huge spike in market positives and magnitude. Then
in 2004 Kerry had more market positives then Bush having 12 where Bush only had 9. After
looking at all the data that was acquired for this hypothesis it was noticeably very sporadic with
no identifiable pattern. Plus the incumbents only have a small number of total days where the
market was up rather than down and the challengers have more total market positives then
incumbents. In order to fully explore this hypothesis more data will be needed but based off of
the incumbent elections there is no data that would support the hypothesis with any degree of
confidence.
Some data that was found particularly intriguing was the fact that when the incumbents
of 1984, Reagan, and 1996, Clinton, their previous elections held extremely high spikes in
market magnitude and market overall positives, enough to be noticeable from all previous
elections. Then in their election where they ran as incumbents also had a greater net positive on
the market over their rival. In the case of the 2012 election, Obama had the largest spike of any
president in 2008 and so far in this election he too is leading his rival in regards to the total
number of market positives. The table below includes everything up to the the inauguration.
OBAMA Total ROMNEY TotalDOW NASDAQ S&P 500 DOW NASDAQ S&P 500
4 5 5 14 2 3 3 82 1 1 4 2 2 2 6
As predicted based off of the other two elections, Obama has more positives and fewer negatives
then that of Romney. Based solely off of this trend where a President had a large spike in their
first election, then beat their opponent in their next election then it is expected that Obama will
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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beat Romney in the 2012 General Election for the White House even though the market claims to
support Romney, the data are not following those claims, but rather sticking with the historical
trends.
Hypothesis 7
This last hypothesis focuses solely on the effects of Election Day and the Inauguration of
the president and what effects that has on the market. The prediction is that the market will be
consistently up and not by a little but by a lot due to the patriotic effects and “feel good”
atmosphere of the two days. What was found on both these days is displayed in the graphs
below.
DOW JONES NASDAQ S&P 5000
2
4
6
8
10
12
Election Day Results
updown
DOW JONES NASDAQ S&P 5000
1
2
3
4
5
6
7
8
Inaguration Market Results
updown
The following table shows the total percentage market increase from Election Day and
Inauguration Day from 1960 to 2008.
Election InaugurationDOW NASDAQ S&P 500 total DOW NASDAQ S&P 500 total
9.24 7.91 10.03 27.18 4.96 7.02 3.06 15.04
The results from the effects of election day and the inauguration are and are not what was
expected. For the Election Day results the market is consistently overwhelmingly positive.
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The following data was compiled by author through DaveManuel.com and Yahoo Finance.
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Examining the elections from 1960 to 2008 it is clear that the financial market is influenced by
the election. 10 out of the 13 elections were positive. The only ones that were not were the 1964,
1984, and the 2000 election where the result was not known until 46 days later. Once the
announcement was made though the DOW was up 2.02% the NASDAQ was down 1.08 and the
S&P 500 was up 0.81%. The rest of the elections all the major indexes were up on Election Day
and not just by marginal amounts. In the 2008 election, which has the highest totals of any
election, raised 10.56% total among the three indexes. The DOW was up 3.28% the NASDAQ
was up 3.2% and the S&P 500 was up 4.08%. 1980 was also very similar with and total increase
on the day of 4.96% and 1984 with an increase of 3.11% Just over 12 days in American history
the percentage increase of the financial market totals 27.18% on election day. Election Day has
proved historically to be a day with large economic returns, even amongst the uncertainty of who
will be elected president for some years and the strong knowledge of who will be president on
other years. Those factors do not appear to affect the market as greatly as the fact that election
day is happening and investors appear much more willing to trade.5
Inauguration day is slightly different. There is not any real clear distinction like Election
Day that the day the president is sworn in has a great effect on the market. For the DOW and
S&P 500, 7 of the days were up and 6 were down and for the NASDAQ 6 was up while 4 were
down. The magnitude of market increase is not as impressive either. The total increase is only
15%, granted still a lot but also greatly influenced by the 2008 eleciton that saw a net increase of
8.46% with the DOW up 3.51%, NASDAQ up 4.6% and the S&P 500 up 0.35%. This could be
primarily because the people already know who is president and what their economic plan is
making the inaguration day not as influencial as the election day since the greatest returns come
5 The above data was compiled by author through DaveManuel.com and Yahoo Finance.
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when the elections are not even close or when the three spikes as mentioned earlier occurred, the
elections of 1980,1992, and 2008. The evidence supports part of the hypothesis that only
Election Day has an effect on the market but does not support that fact the inauguration also has
an effect on the market. For the election of 2012, it would be sufficiently accurate to say that on
Election Day the market will be up but for the inauguration no real significant increase in the
market would be expected. 6
Conclusion
This study on the financial market’s major indexes and if they are effected by major
campaign events is related to previous studies aiming to examine what effects, if any, are there
on the financial market or create a market to predict who will be president. The study conducted
in this paper tried to do both, use the market to predict who will be president of the United
States.
Based off of the research found there consistently appears to be a correlation between the
market and significant campaign events. Typically the winner of the election will have more
events that have the market up then that of the challenger. For the 2012 election, Obama has
more total positives then that of Romney with a lead 11 to 8 over Romney and not as many down
days as Romney either. Also the total magnitude, or percentage of change the market has had
following a major campaign event for each candidate is also favoring Obama. Romney has a net
loss of -4.99% while Obama has a net increase of 4.14%. Based solely off this data it would be
predicted that on the eve of the election Obama would win the election.
6 The above data was compiled by author through DaveManuel.com and Yahoo Finance.
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Also, after looking at debates there appears to be a correlation between the winners of the
debates, the polls, the market and the winner of the election. Where, for the most part, the
candidate that wins the debate and has the lead in the polls the market will typically be up. But if
the candidate that loses the debate but is ahead in the poll then the market the following day will
most likely be down. This occurred over many of the election debates. But as for this election the
market is very volatile and the polls are extremely close making a prediction based off of this
data tremendously difficult to conduct.
During the 2012 election an incumbent is running and historically the incumbent has had
a greater positive effect on the market than that of the challenger. The incumbent especially if
their previous election that had a huge increase in market value, 1980, 1992, and 2008, had better
market results their next election and was reelected. In the case of 2012, Obama is running again
after having one of the larger market increases based off of major events over any election in
history from 1960 to 2008. So far for this election he has the better numbers in the market and
based off of the trends on the incumbent data, would be reelected.
Finally the results of campaigns specifically have had great positive effects on the
market. With ever election, just based off of major campaign events has seen increases with the
exception of the years of 1972 and 1984. The largest increase occurred on the 1980, 1992 and
2008 elections. Elections where big political shift occurred in the government and the winners of
the election had very large margins of victory as well.
The implications of this study show that politics and the financial market are linked and
are affected during the presidential election process. This research provides insight on how the
market reacts based solely off of major campaign events while examining other variables like
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polling data and any other major events that can affect the market for those specific days. Based
off of this research to a degree it is possible to predict who will be president based off of how the
market reacts after major campaign events.
As for what could be studied in the future would be to examine more of the polling data
at the same time of the major election events, not just debates, and see if those number can be
correlated to major campaign events and how the market reacts or by going back and examining
what the specific monetary policy was during that time and seeing if Republicans or Democrats
have a greater positive effect on the market over the other. Also, by going back even further in
history would provide for more data and possibly clearer patterns and results on how the market
reacts after major campaign events. But either way based off of this data alone, there is evidence
that the market does react to major campaign events and any more data would only be
supplemental to what has already been collected. 7
Works Cited
7 All results and dates for research were compiled by the author through the Wall Street Journal, New York Times, Washington Post and other websites located in the works cited page.
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Cooper, N. (2012, October 16). Which Changed First, the Polls or the Markets? . Retrieved Ocotober 16, 2012, from The New York Times: http://www.nytimes.com/2012/10/17/business/debating-the-elections-cause-and-effect-on-wall-street.html?pagewanted=all
Dan Ackman. (2004, July 21). Presidents And The Stock Market. Retrieved September 17, 2012, from Forbes: http://www.forbes.com/2004/07/21/cx_da_0721presidents.html
Forsythe, R. (1992). Anatomy of an Experimental Political Stock Market. American Economic Review, 1142-1161.
Geaney, D. (2011, April 24). 1960 Kennedy/Nixon Debates . Retrieved 12 2012, September , from Presidential Campaign Rhetoric: http://campaignrhetoric.wordpress.com/2011/04/24/1960-
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kennedynixon-debates-david-geaney/
Halcoussis, D., & Lowenberg, A. (2009). The Obama effect. Journal of Economic Finance, 324-329.
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