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.

Baker

DOW

JONE

SNA

SDAQ

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500

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JONE

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1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

0

2

4

6

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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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Ford Carter

-3

-2

-1

0

1

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4

5

1976 Election % change

Bush Dukakis

-4

-2

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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

10

15

20

1980 Election

updown

Bush Clinton Perot

-10

-5

0

5

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1992 Election

updown

McCain Obama

-15

-10

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2008 Election

updown

Clinton Dole

-6

-4

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1996 Election

updown


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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

0

0.1

0.2

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Johnson Goldwater

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-4

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1964 Election

updown

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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

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-1

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Reagan Mondale

-15

-10

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1984 Election

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.


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Bush Clinton Perot0

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1992 Election

Bush Clinton Perot

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1992 Election

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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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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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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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.


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

20



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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.


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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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

22

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

Baker

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.


-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


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

25


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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,

27


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1

2

3

4

5

6

7

8

9

1980

updown


2

4

6

8

10

12

1992

up down


1

2

3

4

5

6

7

8

1984

updown


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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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.

29


Baker

Both of which were significant in hypothesis 5 as the stand out elections that had large increases

in market magnitude.


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

30


Baker

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

31


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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.


2

4

6

8

10

12

Election Day Results

updown


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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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


33

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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.


34

Baker

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

35

Baker

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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Baker

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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

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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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Li, J., & Born, J. (2006). Presidential Election Uncertainty and Common Stock returns in the United States. Te Journal of Financial research, 609-622.

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Nippani, S., & Bobby, M. (2002). The 2000 Presidential Election and the Stock Market. Journal of Economics and Finance , 162-169.

Popper, 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

Reserve, S. L. (1973, January). The U.S. Economy in 1972. Retrieved October 20, 2012, from FRASER: Federal Reserve Archive: http://fraser.stlouisfed.org/docs/publications/SCB/pages/1970-1974/8713_1970-1974.pdf

Saad, L. (2008, September 25). Presidential Debates Rarely Game-Changers. Retrieved September 13, 2012, from Gallup Politics: http://www.gallup.com/poll/110674/presidential-debates-rarely-gamechangers.aspx

Santa-Clara, P., & Valkanov, R. (2003). The Presidential Puzzle: Political Cycles and the Stock Market. The Journal of Finance, 1841-1872.

Schwartz, S. (2012, September 5). A Two Faced Strategy to playing the Election. Retrieved October 22, 2012, from CNBC: http://www.cnbc.com/id/48861320

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Temple-West, P. (2012, 21 Aug). Stark Differences in Ryan, Romney, Obama Tax Plans. Retrieved Noevember 1, 2012, from CNBC: http://www.cnbc.com/id/48739927

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Dave Manuel.com. October 1, 2012. http://www.davemanuel.com/where-did-the-djia-nasdaq-sp500-trade-on.php.

Roper ipoll . October 2012. http://webapps.ropercenter.uconn.edu/CFIDE/cf/action/ipoll/.

The New York Times, The Wall Street Journal, The Washington Post

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