Newswise — UNIVERSITY OF CALIFORNIA, BERKELEY’S HAAS SCHOOL OF BUSINESS—Imagine if investors could accurately predict when the market would surge. When the U.S. experiences three simultaneous conditions—a major macroeconomic news day, a Democrat President in office, and pre-election day—the U.S. stock market surges an average of 17 basis points, according to a new study. 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,” a working paper 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.
Their research builds on prior studies that found the U.S. stock market has fared better under a Democratic presidential administration than a Republican one 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 (FOMC) decisions, job numbers, and inflation were announced, conditional on whether a Democrat or Republican President occupied the White House.
In response to announcement days and Democratic administrations, the rise in equity prices was stronger:
- For large and medium capitalization stocks, roughly defined as those valued at $2 billion and more- During 1990 and 2015- In international returns as well- During announcements in successive Democratic administrations
History shows that “equity premiums” occurred during both the Democratic Clinton and Obama administrations; that is, 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 FOMC 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 opportunistic political behavior, though it is not clear how an administration could repeatedly pleasantly surprise investors and voters,” says Marsh.