March 26, 2017

News Release

Can Investors Be Optimistic Under a Republican Administration?

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Study identifies the ideal trio of national events that causes markets to surge

UNIVERSITY OF CALIFORNIA, BERKELEY'S HAAS SCHOOL OF BUSINESS—The three magic musts for a stock market rally? It must be a major macroeconomic news day, a pre-election day, and there must be a Democrat president in the White House, according to new research.

When the country experiences these three conditions simultaneously, the U.S. stock market surges an average of 17 basis points. This significant equity return is 10 times higher than on other days, including on macroeconomic news days when Republicans are in power.

The findings can be found in “The Presidential Puzzle: Democrats, Macroeconomic News and Equity and Bond Premiums on Announcement Days,” co-authored by Prof. Emeritus Terry Marsh of UC Berkeley’s Haas School of Business and Kam Fong Chan of the University of Queensland Business School. The research builds on prior studies that the U.S. stock market has fared better under Democratic presidential administrations since the 1960s and that stock prices tend to rise on days of macroeconomic announcements.

Marsh and Chan analyzed 13,000 daily returns for the overall stock market during two sub-periods: 1964 to 1989 and 1990 to 2015. They averaged the market index return over days on which Federal Open Market Committee decisions, job numbers, and inflation were announced, conditional on whether a Democrat or Republican President occupied the White House. 

The effect was amplified even further for large and medium capitalization stocks (roughly defined as those valued at $2 billion and more); during the period 1990 to 2015; or during announcements in successive Democratic administrations. In addition, the heightened effect was seen in international returns in Italy, Canada, and the U.K.

History shows that during both the Democratic Clinton and Obama administrations, stock market returns exceeded the risk-free returns of government bonds. However, the study also found gains in stock returns during Republican George W. Bush’s tenure when they restricted the analysis to Federal Open Market Committee announcements alone. More generally, macroeconomic announcements had a positive impact on Treasury bond returns in Republican administrations over the entire 1964-2015 period.

“We can’t say for sure why we see these results. It is tempting to reach for an explanation involving higher long-run risk or opportunistic political behavior, though it is not clear how an administration could repeatedly pleasantly surprise investors and voters,” says Marsh.