The Relationship Between the Stock Market and the U.S. Presidential Election Cycle

Policy uncertainty in the United States has been on the rise over the past decade. The goal of this study is to determine if the most recent Presidential election cycle supports prior literature regarding returns and volatility on the stock market. Prior literature suggests the stock market will experience lower returns and higher volatility during a Democratic Presidency. Since political party definitions have changed over time, tax policy and federal government regulation policy are used as proxies for political party in this paper. The Democratic party’s current stance on taxes and federal regulations is expansionary; tax hikes are preferable to tax cuts and more regulations are preferable to less regulations. Using stock market, political, and economic data from 1928 to 2017, this study explores the relationship between major events in the presidential election cycle (including election day and the Republican and Democratic National Conventions) and returns and volatility within the stock market. The findings indicate that the ideas presented in prior literature partially apply when including the most recent U.S. Presidential election cycle. When a President is elected who prefers raising taxes, the stock market tends to have lower volatility but might experience decreased returns. When a President is elected who prefers large government, the stock market tends to experience higher returns but also higher volatility.

The Relationship Between the Stock Market and the U.S. Presidential Election Cycle Presentation