The Presidential Election Cycle: Examining Stock Market Returns and Movements of the 21 st Century By: Christian Garcia, Angelo State University – Honors Program & College of Business Introduction The objective of the this project is to inform voters and investors about the Presidential Election Cycle: (1). In regard to voters, past observations from the Presidential Election Cycle have revealed that Republicans are better at creating wealth and Democrats are better at stimulating the small cap sector of the economy. The objective is discover if this hypothesis holds and to compare the returns of both presidential administrations. (2). In regard to investors, the objective is to provide more research on the existence of a cyclical cycle that could produce advantageous investing strategies. If the pattern does not exist the objective is to then explain the factors that could be behind its absence. Objective Data Acknowledgements Conclusion Republicans V. Democrats The Presidential Election CycleMethod Many Financial Scholars have argued that a cyclical pattern called the Presidential Election Cycle exists within the stock market and that it disproves the Weak Efficient Market Hypothesis (no investor can continuously perform better than the market using trading rules). Past financial literature about the Presidential Election Cycle has revealed a repeating pattern in each year of an administration; Year one and two consistently revealed declining returns on equities while year three and four produced positive returns. The research will be continued by examining movements and returns of the S&P 500, Russell 1000, Russell 2000, and Nasdaq Composite Index for the 21st century. Two presidents have been elected in the past 16 years; Bush and Obama. The George W. Bush and Barrack Obama administrations will be split into four terms in order to examine the returns and movements of each year. If the returns and market movements match the patterns of past experiments, then the hypothesis of the Presidential Election Cycle may hold its credibility. As the 2016 presidential election approaches, this research may give investors an advantage in investing strategies. The research may also demonstrate which political party can best stimulate the economy. Therefore, the research will provide some insight to investors and voters alike in selecting the next President of the United States. Scholars and citizens alike have wondered which political party has produced the best returns on the stock market. Research on The Presidential Cycle has allowed new information to be discovered about the differences in market movements and returns produced by Democrats and Republicans. Past results have shown that Democrats tend to focus on small corporations or small cap markets while Republican administrations tend to service big corporations or large cap markets. Some observations of the annual return graphs and charts include: (1). In the Annual Return Comparison section, Bush tends to be more volatile than Obama and produces lower returns over his eight year administration. Also, it is worth noting that the last year of the Obama administration may produce the Presidential Election Cycle. (2). In the Annual Returns of Bush & Obama section, I graphed the table to see if I could identify another pattern that was not existent in the indices chart. After my observations, I could not find another noticeable trend. (3). In table section below, I observed that president Obama’s policies spurred positive market movements and returns. Comparing Bush and Obama year to year, president Obama consistently outperformed Bush. The first person I would like to thank is my undergraduate research mentor and associate professor of finance, Dr. Biqing Huang. Dr. Huang motivated me to delve into the intersection of finance and politics. She has taught much about the field of finance and has inspired me to continue my research on the Presidential Election Cycle. Secondly, I would like to thank Dr. Shirley Eoff of the Angelo State University Honors Program. I would also like to thank Dr. Thomas Bankston, Dr. Murat Kara, Professor Vincent Mangano, and Professor Cherly A. McGaughey of the ASU College of Business. I also must thank students Jenni Debie, Christopher Flores, Ryan Linebuagh and Natalie Fogle of the College of Business. They have all contributed to my research and have allowed this project to prosper. Also, the Office of Sponsored Projects deserves a BIG thank you for funding my research. Thank you! In order to fulfill my objective, I selected four indices that would allow me test two questions: (1) does a cyclical pattern exist within the four year terms of 21 st century presidential administration and (2) are the differences in market returns between Republicans and Democrats? The selected indices are listed below: (1). S&P 500: A Index that is widely regarded as the best measure of large cap equities; selected because the index is a great representation of the large cap market. (2). Nasdaq: A large cap index that measures most of the Technology Sector; included to test if differences would arise from two different large cap indices. (3). Russell 1000: Considered the bellwether of large cap stocks; included to add another large cap index in order to observe if differences exist between indices. (4). Russell 2000: A index that serves as the benchmark for US small cap stocks; selected in order to test if a difference exists within the PEC and in policy of political parties. George W. Bush First TermSecond Term IndicesYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8 S&P %-20.70%28.29%3.22%-4.75%13.40%-7.36%-36.73% Nasdaq-31.74%-27.78%57.45%-4.75%9.86%9.06%-6.49%-37.14% Russell %-20.28%29.66%3.45%8.86%12.82%-8.09%-38.71% Russell %-18.38%53.03%4.43%15.07%10.41%-13.68%-35.43% Barack H. Obama First TermSecond Term IndicesYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8 S&P %12.50%2.74%13.47%23.53%9.69%-8.07%10.78% Nasdaq59.02%18.03%3.05%6.60%34.81%10.15%-3.93%8.90% Russell %15.04%1.08%13.96%24.33%9.22%-8.79%11.71% Russell %21.65%0.84%14.61%30.75%-0.47%-14.61%11.85% Annual Returns of Bush & Obama One of the first contributions to the financial literature about the Presidential Election Cycle came from Dr. Roger D. Huang of the University of Florida. In his research, Dr. Huang (1985) discovered an anomaly which he referred to as the Presidential Election Cycle. The anomaly Huang discovered was a cyclical pattern that would produce less risk for an investor and displayed higher returns in years three and four of a presidential administration (Huang 60). Some observations of the graphed indices include: (1). The graphed indices depict the Presidential Election Cycle within the first term of the Bush administration. From 2001to 2003, the indices took a general downturn and then experienced an up swing. After the first term, the Presidential Election Cycle seems non-existent. (2). Now to explain the absence of the Presidential Election Cycle; (1) After 2004 the US lost control of its economy to globalization (BRICS), (2) Or the US enacted economic policy that would allow the US economy to continually expand until the great recession. (3). The great recession caused by (Synthetic) Certified Debt Obligations and Subprime Loans may have disturbed the existence of the cyclical cycle. After the recession there may be evidence to prove that the US still can stimulate the economy because of a continuous increase in market movements and returns. In conclusion, the Presidential Election Cycle does not exist within the last three terms of the 21 st century. The argument that the Presidential Election Cycle disproves the weak form of the Efficient Market Hypothesis, in this case, does not hold its credibility. In order for the PEC to disprove the Weak Form of the EMH, investors must have been able to utilize the cyclical pattern as a trading strategy in order to continuously outperform the market. Through my observations, I cannot justify the existence of a cyclical pattern that would be advantageous to investors. This section does have shortfalls, I must examine more data that dates further into the past and reexamine the same data for a 48 month cycle instead of an election cycle. Also, while examining the Presidential Election Cycle, I found that President Obama produced better returns than President Bush. Though a Democrat outperformed a Republican in stock returns the sample of data was too small to prove that Democrats are ultimately better than Republicans at managing the economy. One observation that can be stated with credibility in this set of data is that a Obama outperformed Bush in both the small and large cap sectors of the economy.