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- HOW CAN STOCK MARKETS IMPACT US PRESIDENTIAL ELECTIONS?
- INTRODUCTION
- BACKGROUND
- THE S&P 500 AND DOW JONES INDUSTRIAL AVERAGE HAVE RETURNED EXACTLY ONE YEAR BEFORE THE PRESIDENTIAL ELECTION
- THE S&P 500 AND THE DOW JONES INDUSTRIAL AVERAGE BOTH RETURN THREE MONTHS BEFORE THE PRESIDENTIAL ELECTION
- CONCLUSION
HOW CAN STOCK MARKETS IMPACT US PRESIDENTIAL ELECTIONS?
- How exactly do results on the Dow Jones and the S&P 500 impact voters when it comes time to cast their ballots?
- This research analyzes the indicators one year and three months before the elections.
- When an election is close, do people notice how the stock market performs?
INTRODUCTION
The results of the presidential elections in the United States may be affected by a wide variety of variables, including the status of the economy, the history of a voter, the level of participation, the outcomes in swing states, and many more. What about returns on investments made in the stock market?
This is a one-of-a-kind analysis that will evaluate the performance of the S&P 500 and the Dow Jones in the run-up to each of the 22 presidential elections that have taken place since 1932. I will look at how the two indexes fared on average one year and three months before each election and compare their results to whether the party in power at the time won.
BACKGROUND
Let’s think about how the performance of stocks might impact elections in the first place. The price of a share of stock, which symbolizes ownership of a portion of a business, is determined by supply and demand dynamics that reflect investors’ expectations for the future success of the respective company. Some stocks will provide you with a dividend and allow you to vote at shareholder meetings. However, you will have the right to sell the shares later, which is the most crucial benefit.
When the price of a share of stock increases in value, the holder can earn a profit by selling the share at a higher price than where they first purchased it if investors believe that a company will be able to provide higher profits in the future, there will likely be an increased demand for the shares, which will cause the price to climb. Particular factors and systemic forces can influence the direction a stock might move. This article focuses on the latter topic, which refers to how the state of the economy in the United States influences stock prices.
The S&P 500 and the Dow Jones are stock indexes, and each assigns a unique weighting to several significant economic sectors, such as the information technology industry, the real estate market, and the energy sector. Investors may believe the underlying companies can create more profits if their returns are favorable going into an election. This might be because of an optimistic perspective on the rate of economic development, which could increase the likelihood of the ruling party retaining its hold on power.
If, on the other hand, stock returns are negative coming into an election, this may indicate that investors have a more gloomy view of growth. If this is the case, it is reasonable to conclude that the party seeking reelection has a greater possibility of losing its position than the party not seeking reelection. Of course, this is the case only if the majority of voters place a high value on the performance of stock markets. This is a shortcoming of the research, which will be described in further detail later.
THE S&P 500 AND DOW JONES INDUSTRIAL AVERAGE HAVE RETURNED EXACTLY ONE YEAR BEFORE THE PRESIDENTIAL ELECTION
Returns on the S&P 500 and Dow Jones averaged positive in 18 of the 22 presidential elections that have taken place since 1932. During that period, there were 22 presidential elections. The incumbent party won 11 of the 18 elections, equivalent to around 61.11% of the total. In the other four instances, returns from the stock market turned out to be negative. The incumbent party was defeated in three races, equivalent to around 75% of the total; see the table below.
THE S&P 500 AND THE DOW JONES INDUSTRIAL AVERAGE BOTH RETURN THREE MONTHS BEFORE THE PRESIDENTIAL ELECTION
What findings emerge from this investigation when the period is altered from one year to three months before an election? In this instance, there were 13 instances out of the total of 22 when the returns on the stock were positive. Eleven of the contests, or 84.62%, were won by the party already in power. During this time, there were eight occasions when the stock returns were negative. In this scenario, the incumbent party came out on the losing end seven times, corresponding to a failure rate of around 88.89%.
CONCLUSION
The data collected every three months yields more consistent results than the data collected one year out. The performance of the stock market in the days leading up to an election strongly correlates with the outcome of the race between the two parties currently in power. One must realize that correlation does not always indicate causality in any given situation. Three months before an election, voters pay more attention to current events, putting more importance on stocks. This would be in preparation for casting their votes. This research does have certain restrictions and limitations.
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