Presidential Election and the State of the Essay

Excerpt from Essay :

Presidential Election and the State of the Market

finance and capital market fluctuates to both positive and negative events. It is argued that the presidential election in November 2012 in the U.S. can have worldwide financial ramifications. There are arguments from economic agencies like Bloomberg that there is an importance of elections for the markets, but it is stated that some of the fears are myths. The U.S. presidential election in November 2012 has got the financial market in volatile conditions. This it is argued is because of some individual perceptions. Some of the myths are that 'party affiliation matters when it comes to market returns.' (Koesterich, 2012) There it is argued, no scientific basis for this contention. There is also the observation that when the democrat becomes president, the average return for the Dow Jones is 8.5%; for Republicans the average is around 6%." (Koesterich, 2012)

Some of the investors also believe that a 'divided government is good for the financial markets.' The outcome of the election is very important not only to the economy but also the financial markets. Thus the election will affect the economy a great deal. There is also a possibility of the country going into recession. On the other hand, a new government may also be able to make real progress and both the cases are very important to the capital markets. The changes in the government and President Obama's re-election or defeat could push stocks lower and volatility higher. Both ways the election is going to be a tumultuous time for U.S. financial markets. November 7, 2012 is not far off and the dollar prices have already become volatile. If Obama does not win the election then the new government will still try to stabilize the dollar, and that would mean that a worse aggressive stand will be taken. They will create strife in the Middle East, Asia and other regions and sell arms to begin with. So there will be an effect worldwide.

Thesis Statement: The upcoming Presidential Elections in November 2012 and events after the outcome will affect the financial market and investors to a great extent.

a. Effects of the election on financial markets world wide:

The elections create uncertainty and as pointed out is a point of change in policies. These policies are important not only to the U.S. But also the world at large. Let us have an understanding about the market. It has to be noted that the private-equity firms' investments in India in 2011 was ten billion and more funds of un-invested capital with private-equity funds. To point out "there was an $828 million commitment by Bain Capital LLC and Government of Singapore Investment Corp. To Hero investments, the Hero group holding company which bought Honda Motor Co.'s 26% stake in Hero Honda Motors Ltd., now known as Hero MotoCorp Ltd." (Krishna, 2012)

In the last decade the global finance market has found the Indian market lucrative especially with the Forex and commodities. China has also opened up its financial markets and the investment flow can be two way in future. Flows can occur not only to China and India but also from these countries to the Wall Street. The fact however is that, there are still differences at the political level and lot of turmoil especially with regard to U.S. relations. Therefore these markets may also become unsafe for investment for some time. Therefore a global ripple is possible.

b. The future significance

Whatever be the results, this winter there is bound to be changes with far reaching consequences for the world economy. Merchants are following the 'wait and watch' attitude. Under the circumstances and Obama standing for elections following a socialist agenda, it is possible that the dollar will crash again near the elections. It is also necessary for the Obama Government now and if he gets elected -- in future to follow a domestic protection policy and at the same time prey on lesser economies. His economic advisers seem to have taken this stand and the opening of Indian markets and subsequently Chinese markets for retail and FDI is on account of U.S. pressure. This is going to result in some whiplash so far as the next incumbency is concerned. Therefore the question boils down to the fact: 'Does the elections have direct long-term impact on the financial market?' If so how will it affect the wages and the living of average Americans? It is primary that there seems to be a correlation between election cycles and the finance market. The four-year U.S. election cycle also affect the economics, and market. This is because the elections are important market events and since it decides the political stakes in "presidential, parliamentary or legislative elections often translate into changes in policies which can reshape the economic environment." (Ro, 2012a)

The regular periods of elections also create a cyclical pattern in government and investment behaviour. Elections also create a political and social uncertainty. These three factors have the potential to affect all asset classes, especially equities, given their strong sensitivity to changes in the economic outlook. Based on this a thesis can be attempted.

Cause and Effect:

The presidential cycle is also good for the market and in researches done previously it was shown that the elections always bring about some change in the financial situation that affect investors and the common man. This is referred to as the 'presidential cycle." (Singer, 2012) A review of the current literature show that there is substance in the hypothesis and it is supported. There have been many opinions and systematic studies on the subject. As was pointed out, "Goldman Sachs' Jose Ursua, Professor Robert Prechter, and S&P Capital IQ's Sam Stovall believe that the election cycles 'have major economic and behavioural implications for the stock markets." (Ro, 2012b)

It is also stated that the third year of the president is good for the stock market. It was also observed that the market volatility spikes in the second year, then levels off. It can be noted from the graph below that the president's popularity and the performance of the stocks are correlated. See Graph 1 below: Likewise it can also be shown that the second year shows the peak of the activity and the changes in the financial structure occur in those periods. For this the incumbent's terms were analysed: See Graph 2 Below: the graph would show the rating for the SAP for the presidential cycles from 1900s. (Oumar; Zaman, 2011)

This contention is further fortified by the researches of Oumar and Zaman (2011) that have done extensive research on the link between stock returns and the presidential cycle in the United States. They have gone on to show that the stock returns are lower in the Republican presidencies and it is higher in democratic presidencies. They have shown this by analysing data from July 1926 -- December 2007. It was concluded that the stock markets performed better during democratic presidencies than during republican presidencies. The reason attributed to this is that under democratic presidencies, there are expansive policies that help smaller businesses. There is also a size effect when the democrats "control the White House, the U.S. Senate, and the U.S. House of Representatives at the same time." (Oumar; Zaman, 2011)

Therefore there is a significant force on the economy owing to elections and the election results. G. Jeffrey MacDonald however argues that from 1952 stocks rise up in the last seven months during the election and boost the stockholders' portfolios. There are positive returns for S&P 500 stockholders in the election years. Further the stock values tend to rise when a sitting president is running for re-election. Though these are factors there are other cyclical forces like seasons, spring and summer. Thus there are some patterns that can occur during the election years that may change the portfolio gains and change capital markets. (MacDonald, 2012) This can have direct impacts on the investors and indirect impacts on the people especially the salaried and the investing class. While direct impact may be on the economic situation of the nation, it can also affect individuals thus causing negative indirect impact.

Indirect Impacts

Indirectly the instability will affect the employees and their personal finances. The impact on the financial stability of America will indirectly affect the personal finances of all persons. The economy as of now has "$15 trillion dollar debt burden, economic uncertainty, weak housing market and extended unemployment shaking the confidence of millions." (Davidson, 2012) The post election scenario will evolve into an increase in the marginal income tax rates, more government spending, and changes to the political landscape are imminent and can affect personal wealth. The warning is that the attempt to predict market cycles can lead to oversimplification, and can hurt individual investors. The limitation is that the market behaviour is difficult to predict and it is also claimed that the in-depth analysis of the impact of one candidate's victory over another is…

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