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Money and politics

All the financial markets tumult is really nothing compared to extreme uncertainty now hanging over the political realm as the U.S. presidential election season moves into high gear.

As confusing and unsettling as the recent volatility in equity markets around the world may have been, all that tumult is really nothing compared to extreme uncertainty now hanging over the political realm as the U.S. presidential election season moves into high gear. After inconclusive sparring in the first few rounds in Iowa and New Hampshire, the candidates in both parties are bracing themselves for a long and bruising nomination battle, with outsiders like Donald Trump and Bernie Sanders presenting a stiff challenge to the party orthodoxy. On the Republican side in particular, with Trump as front-runner and no clear favourite emerging for the party mainstream to rally behind, the prospect of a brokered convention is beginning to look like a distinct possibility for the first time in more than 60 years.

We have no intention to hazard a prediction in such a season of political uncertainty. But whether America’s 45th president turns out to be a fence-building xenophobe or democratic socialist, we nonetheless think it’s helpful for investors to remember there are a few significant and well-documented correlations between presidential politics and the future course markets and the economy, which often get forgotten or overlooked as a result of our respective partisan enthusiasms.

To start with some recent research shows a strong correlation between stock market performance and the U.S. presidential elections when looked at over the course of the full 4-year cycle. In a recent published paper available online here, business school professor Marshall Nickles reviewed stock market performance during the post-World War II period, and concluded that stock market bottoms have coincided surprisingly close to mid-year congressional elections, or typically two years before the presidential election. Testing this observation against various investment scenarios, Nickles concludes that “investing for the 27 months before a U.S. presidential election certainly seems to be more profitable than investing during the 21 months after the elections.” Mind you, based on the research, this seems to hold true irrespective of the outcome of the election.

In another recent bit of academic research available online here, a team of economists led by Wen-Wen Chien would seem to support the efficient markets hypothesis with the conclusion that the after-election movement of the stock market has progressively been more accurate (over the course of the post World War II period) in predicting subsequent GDP growth. While not part of the research team’s formal conclusions, the paper also notes that the average cumulative GDP growth for four years under Democratic administration is 18.51 percent since 1900 and 15.33 percent since 1953, while under Republican presidents the numbers are 10.71 percent and 11.21 percent, respectively, which may somewhat help to explain the market’s remarkable predictive powers.

And finally, in addition to these observable correlations between the presidential election cycle and stock market performance, there is also the undeniable fact that the quadrennial presidential sweepstakes are invariably a boon for the media business. According to the highly respected Cook Political Report, total ad spending on U.S. political races this year is estimated to come in around $4.4 billion. Of that astounding total, local media is sure to garner the largest share, with Cook estimating that $3.3 billion will go to local broadcast TV and approximately $800 million in local cable TV ad spending. If nothing else, this is certainly going to be a big year for local TV and cable stations in swing states like Ohio and Florida!

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