Two of presidential debates have been proceeded; the two candidates are preparing for the presidential election on Tuesday, November 3rd. The dollar has been weakened mainly due to three reasons: relatively strong Chinese GDP growth has made Chinese currency attractive, investors are buying Chinese corporate bonds (yields are higher than U.S) as Chinese government is steadily in progress in opening their financial market, and expectation of Democratic Sweep (Blue Wave). As Democratic Party has less philosophy on fiscal soundness (stability), the more hopes on stimulus measures and government expenditures are putting dollar on pressure. However, investors often misunderstands that Democratic Party or Republican Party will help the stock price rise. However, the direction of stock market is not determined by particular party from either bipartisan. The history explains the reason.
The S&P 500 index originally began in 1926 including only about 90 shares, so called ‘composite index’. Since the appearance of S&P 500, average annual increase rate of Republican Party was 9.3% while Democratic Party was 14.5%. This may look good for Democratic Party. However, The Great Depression and Financial Crisis was a big factor for stock market deterioration during Republican president. As S&P index started, the Great Depression came in three years as president was Republicans (Coolidge and Hoover). Right after the depression started to fade away the stock market skyrocketed 53% during the first year of Democratic president (Roosevelt). It applies similarly to President Obama as stock market surged about 27% during his first year of president right after President Bush, whose stock performance was -37% in the fourth year.
Excluding these huge fluctuations, the average annual return rate was close to 11.1% for Republicans and 13.6% for Democrats (In fact, except for Hoover and Roosevelt, the Republican Party has been higher than the Democrats.)
Annual yields during the presidential term
The first year has been 8.1%, 9% for second year, 19.4% for third, and 10.9% for the last year. An interesting pattern is that in year 3, stock prices never had low returns except in 1931. And in the fourth year, the negative rate of return was four times including the financial crisis, but often recorded double digits except for that.
In the first half (first and second year) presidential term, the rate of return is highly volatile. The negative returns is higher than in years of three and four. Investor’s avoiding legislative risks in the first half is the main reason. The legislative risk gives big impact on the stock market. The legislation contains redistribution or regulatory change in property rights. Politicians push for legislation, saying it can bring about amazing social development such as antitrust law and rules based on populism. The coercive policies are implemented in the first and second year which raises more of risk on stock market. Later, legislation risk decreases in the second half of presidential term.
Why is it divided into the first half and the second half? First of all, the meaning of the word politics is ‘poli’ (many Latin words) + ‘tics’ (blood-sucking ticks). Every president thrives to achieve only goal which is to be re-elected. So, most of legislation should pass the congress in the first or second year. That's why midterm elections haven't always had good results (except George W Bush). Most pass legislation within two years of taking office. After that, they passed less than before, and political risk aversion fell to a low level. On third year, the stock market starts to rise. In the fourth year, the average return is good because of some political activities ahead of the election. C the side effect takes place for extreme situation, but the stock market usually outperforms because strong legislation is not passed.
For example, in the first year of Obama, Health Care Reform was promoted, and in the second year, the Dodd Frank Act was passed. However, in the third year, there were no critical legislation except for raising the limit of government debt.
So what do investors or entrepreneurs think? Usually, they support Republicans since they execute business-friendly campaign as many think Democrats are less business-friendly and stock market-oriented. When the Republican president is likely to be elected in the fourth year, the stock price rose 15.6% per year whereas 6.7% rose when Democratic Party is likely to be president. Meanwhile, in the inaugural year of the Democratic president, the stock market rose 14.9% whereas, Republican President rose only 0.8%. Investors commonly think The Democratic Party condemns Wall Street however, they later change into moderate stance regarding stock market in the election year. Don't make Wall Street rich people angry. In other words, just because the Republican Party is in power does not mean that the stock price will rise significantly or that the Democratic Party will significantly decrease. When it comes to dollar, the dollar weakens on election year when Blue Wave is on expectation as Democratic party prefer more government expenditures. Later, the dollar gains its value. Otherwise, when Republican sweep is anticipated, the dollar strengthen expecting of firm fiscal soundness. However, Republican has fiscal deficit later on especially on the Reagan times. Meanwhile, Clinton times had the record fiscal stability.
Presidents who were not re-elected
Regarding S&P 500 so far, 14 of the presidents have been re-elected, while Ford, Carter, and George H.W. Bush were the ones who failed. In the case of Ford, except for the election of congress member, he has never won any election. The reason that Ford became a president was because President Nixon resigned attributing to Watergate Scandal. Ford, who was vice president that time, became president. Carter defeated Ford and became president. He was lucky to compete for election with the weakest president. But Carter's misfortune, the misery index (calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate) due to oil shock, and the strongest candidate in the Republican Party's history (Reagan, the greatest communicator), failed Carter's tenure. Father Bush had to fight with a slight recession in the fourth year. He was unlucky because he inherited huge budget deficit from Reagan, the former president. FED hiked interest rates to responded to negative impact of previous president's economic policy. As soon as the term ended, the downturn ended, but the best debater in history, Clinton, appeared in the election race. “It's the economy, stupid,” said Clinton who was elected after the campaign of attributing the fourth-year stock market single-digit growth to economic recession. During the Bush era, the economy was not very bad and even though he won the war, he gave the regime to Clinton. .
This it, you can write an economic paper
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