Thursday, 11 September 2008

Stockmarkets and governments

I quite like Tom Stevenson's stuff on the Telegraph (if you believe some research, this might be in no small part due to the fact that he's called Tom), and he's got a good piece in there today on the performance of the US stockmarket depending on who wins the presidential election. Here's main bit:

As for the markets, it is even less clear that the comings and goings on Pennsylvania Avenue make any difference at all. Certainly, the conventional wisdom that investors prefer the business-friendly policies of the Republicans is wide of the mark. According to Ned Davis Research, an institutional research firm, the Dow Jones average has risen 7.2pc a year on average under Democratic presidents compared with just 3.6pc a year under the Republicans. Admittedly, inflation has also been higher under the Democrats so, adjusted for rising prices, the lead is less convincing.

An important point to bear in mind when analysing stock market performance and the political cycle is that coincidence is not the same as causality. Who's to say that the performance of the market in an election year is not a reflection of investors starting to discount a new administration rather than an assessment of the current incumbent?

Of greater significance seems to be the balance of power between Congress and the White House. For example, in the years since the Second World War, when the Democrats have controlled Congress (as predicted this year) the post-election year has been a good one for investors under a Democrat President (+12pc on average) but relatively poor under a Republican (-1pc on average).

If you think stockmarket movements are informed/meaningful this is indeed a bit odd. Most of us would assume that the perceived more pro-business orientation of the Republicans would receive positive feedback from the markets.

A couple of thoughts off the top of my head - perhaps markets believe that the Republicans are pro-business/pro-executive rather than pro-capitalism, and that cronyism (which ain't good for competition/efficiency) results from the GOP winning. Or maybe it's just more evidence that you can read anything into markets, especially things that aren't actually there. Actually markets don't even tell us much about the state of the economy, as Robert Shiller has pointed out.

Finally, you might be wondering if anyone has done anything similar on stockmarket performance and election results in the UK. Well, there was some research done by a stockbroker for the Centre for Policy Studies about market performance under Labour. All I can say is that there's another good reason why red is our colour...

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