Byrd 1

Richard Byrd

Charles Douglas

UWrite 1103

15 March 2017

How do Presidential Elections Affect the Stock Market?

My inquiry question is a question regarding the stock market and the election of the

President of the United States of America. My question is, What kind of effects do presidential

elections have on stock market prices during and after the election? To answer this inquiry

question, I will be researching information in academic journals, market research reports,

periodicals, and also a live source. By using these research tools to find information regarding

the effects of elections on the price of market indexes, I hope to find an answer to how elections

affect market indexes and their price.

Does the Markets Vote Count? The Informational Content of Post-Presidential Election

Returns

This academic journal was written by Ray R. Sturm. Ray Sturm works in the Department

of Finance at the College of Business Administration at the University of Central Florida. The

article was published on March 1, 2014 in the Journal of Wealth Management. The article is 11

pages long and goes into deep detail of market reactions after a presidential election has taken

place. The academic journal by Ray Sturm discusses market returns following a presidential

election. The article describes eight formulas used to predict market returns after an election.This

journal entry uses information and statistics of 29 presidential elections covering from

1896-2011, 1896 being the first year the Dow Jones Industrial index provided and tracked data.
 Byrd 2

At the end of his article, Mr. Sturm concludes by noting statistical data from presidential

elections have provided a reliable way to predict market rise or fall based on approval or

disapproval of the president electee.

This article argues that market index returns rise or fall substantially the three days after a

presidential election based on approval or disapproval. Based on the market efficiency model,

index prices adjust to the incoming Presidents predicted ability vitalize the economy. If

stockholders dont approve of the new Presidents ability to build up the economy indexes drop

and vice versa. If stockholders believe in the new President, index prices will rise. As was the

instance in President Obamas 2012 reelection, the day after his election win the S&P 500

dropped 2.37% and another 1.22% the next day. These major drops were in response to the belief

Obama could not rejuvenate the broken economy. The raises or drops right after an election is a

prediction of how the markets will travel throughout the presidency, with a year two reversal

effect. This effect is shows a reliable turnaround of stock indexes in the second year of

presidency based on the performance of the President.

This information is useful for answering my inquiry question by showing two main

patterns following presidential elections. That being there is a three day consistent rise or drop

directly following an election day and predicts what the market will do throughout the

presidency. Also there is a index turnaround in the second year of presidency that is the opposite

of the initial rise or drop after the election. This happens due to the President implementing

policies and having time for those policies to take effect. Based on the effect of the policies being

implemented, the indexes correct themselves resulting in either the reversal or continuation of

the trend. Knowing these patterns can help investors know when to buy, sell, or not invest at all.
 Byrd 3

How do Presidential Elections Affect the Stock Market?

This scholarly newspaper article was published by Philippines Daily Inquirer on February

24, 2016 and is from the Newspaper Source Plus database. It is written in response to an emailed

question of, How do presidential elections affect the stock market? This article compares the

effects of presidential elections on the stock markets of both the United States and the

Philippines. The newspaper article is about the presidential election cycles. This cycle builds on

and relates to the year two reversal effect mentioned in the last entry. The article talks about

returns being at low points directly following an election do to uncertainty during the first year of

presidency. During the second year however, the markets tend to reverse and go upwards for the

remainder of the presidency. Although this article builds upon the year two reversal theory from

before, it also argues the winner of the election has no effect on the market indexes. Rather than

the winner of the election affecting the markets, the articles argues it is the election process that

affects the indexes and keeps the cycle going.

This article is important to answering my inquiry question. It builds on the year two

reversal and further explains how and why the cycle works. As well as building on the idea of

the year two reversal, it also supports and backs up the pattern making it more credible. The

article provides a different look on presidential elections and the affect they have on the indexes.

By saying it doesnt matter who or which party wins rather than it is the election process itself

that causes the cycle to occur it changes how investors may want to invest during an election and

after.
 Byrd 4

Common Stock Returns and Presidential Elections

The academic journal is written by Roger D. Huang and was published between March

and April of 1985 in the Financial Analyst Journal. This article talks about the Republican party

being the more business driven so the market thrives more with a Republican President. Even

with that assumption the article points out the Democratic presidencies had a slightly higher

mean return for common stocks than did Republican presidencies. The article also backs up with

data that there is actually almost no significant difference in common stock returns whether the

president is a Republican or a Democrat. Since there is no major difference in the amount of

return based on the elected party, Huang proposed a cycle based trading strategy based on the

presidential election cycle. This cycle based trading implies that by trading stocks periodically

with election cycles are proven to create more profit for the investor than if the investor traded

the same way year round.

The academic journal by Roger Huang is useful for introducing cycle-based trading. This

idea of trading is taking a different strategy to when the right moment to buy, sell, or get out is.

Cycle trading is cycling in and out at different times and different ways of trading based on

presidential elections taking place. By introducing this strategy, the journal is describing how the

event of a presidential election affects the trading cycle that many investors follow. The article

also backs up the claim from How do Presidential Elections Affect the Stock Market that the

affiliated party with the election winner has very little to do with how the market indexes behave.

That is more the act or cycle of just going through the election process that creates price

fluctuations during and after a presidential election.

 Byrd 5

Presidential Elections and The Stock Market

Presidential Elections and The Stock Market was written by Victor Niederhoffer, Steven

Gibbs, and Jim Bullock. It was published to the Financial Analysts Journal on March 1, 1970.

The article is about trying to find out if the Dow Jones Industrial Average increases significantly

when a Republican wins the election. They do this by comparing the Dow the day after elections

for all elections after 1900. Since 1900, they found that the Dow went up eight times and went

down one with a Republican winner, and went up four times but down five with a Democrat

winner on the day following an election. The average change in the Dow after a Republican win

was 1.12% and was -.81% the day after a Democrat won. There was a average change of 1.30%

for Republican winners and -1.13% for Democrat winners the month following an election. They

also spotted trends happening the week before election where the Dow rose 2.0% the week

before a Democratic win versus a 1.6% increase the week before a Republican win. Their last

argument is that although there are short term fluctuations with a Republican win, the overall

average change of the Dow showed no major differences between Republican or Democratic

Administrations.

This academic journal showed that presidential elections may only cause short term

fluctuations in overall index price due to the winner being a Republican or Democrat. However,

there is almost no difference in average change between the two types of administration. By

knowing this, investors may look to buy or sell in higher volumes during the following days to

months based on the winning party. From the journal, I also now know how the winning party

may affect that stock market for short term cycle trading but will eventually level out to normal.
 Byrd 6

The Live Source

For my live source, I met with Thomas Vencen. Mr. Vencen is a financial planner and

market analyst who works Edward Jones Investing. His office is located in my hometown of

Mooresville, North Carolina. During the meeting, Mr. Vencen told me a little bit about his job

and what all he does. Afterwards, I asked him six questions that had been brought to my

attention while completing my other research. He answered my questions and I recorded his

answers to those questions in a separate document.

Through Mr. Vencen, I learned about some of the effects of presidential elections on the

markets as well as reinforced some of my research. He informed me of some of the biggest

factors to why elections affect the stock markets and what can cause these factors. I really

enjoyed getting a chance to talk to Mr. Vencen and feel that he was a very big help in providing

information for my research paper. Click the link to see the questions and answers!

https://docs.google.com/a/uncc.edu/document/d/1CJSYXQOec55QVcOIu-d9MmoyB9pFAQJIi6

kt9qO1zW0/edit?usp=sharing

Reflection

When I first started my inquiry project I did not have a really good idea of what I was

doing or even trying to research. To help me find a good place to start my research I contacted

the business librarian. I asked her how I could find credible articles and academic journals

related to my topic. I was showed exactly what to type in on the business databases on the school

library website. It brought up thousands of articles about all sorts of things. I filtered the

information to help narrow it down to more relevant things. I quickly began to skim through

articles, reading titles and short summaries. I did this until I found one that I liked and thought
 Byrd 7

could help me answer my question. I used the article and started looking for articles the would

build off of the one I started with. That part was a little bit harder but I eventually ended up with

a few that built off one another.

The most useful source that I used to find my articles is the Business Source Complete

database. I found all but one source within that database. My understanding of the question

quickly evolved as I learned so many different factors of what contribute to changing index

prices due just to presidential elections. Almost everything I thought I knew regarding the stock

market in relation to elections was wrong. I had to learn pretty much from scratch and own my

own which I enjoyed as I havent had to do that in a long time. Mr. Thomas Vencen was very fun

to interview. It was interesting a be able to talk with someone who knows so much information

regarding my topic. He was able to provide a lot of information and assistance. I found and

contacted him online through the Edward Jones Financial Company. This research paper was

definitely interesting and provides so much new information.

 Byrd 8

Works Cited

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,

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

&db=bt

h&AN=94336944&site=ehost-live&scope=site.

"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.