Wall Street echoed a long-standing presidential election trend
last week as news of the incumbents’ re-election bolstered
the market.
On Nov. 4, for the second straight day in a row, investors
rallied as oil prices fell and the Dow Jones Industrial
consequently gained more than 177 points for its best day in
2004.
President Bush’s re-election was credited for the record
high and signs that the market had woken up from its slumber
““ a complaint many investors had been voicing about the
“dead” market.
“There had been a story in the market. … The traders
were telling themselves that the market had done little in the last
six months because everyone was waiting for the election
results,” said Michael Bazdarich, a senior economist with the
UCLA Anderson Forecast.
With headlines such as “Wall Street cheers Bush
victory” from BBC News, investors, economic analysts and
various media outlets reported the reason for the increase in
trading was the stability offered by an incumbent’s
re-election.
Back on the West Coast, though, professors at the UCLA Anderson
School of Management are more cautious about saying the election
win was the reason for the surge. They have different ideas on why
the markets acted the way they did and what Wall Street will look
like in the next four years.
While investor certainty may have been one cause for the rise in
stocks, other factors may also have contributed, Anderson
professors said.
“Even if you attribute the election news to the market
““ which is a big if ““ there was other news in the
market that day,” said Anderson Professor Pedro
Santa-Clara.
These factors include the change in oil prices, yields in long
bonds and the exchange rate of the dollar, Santa-Clara said.
“Investor decisions were affecting the market. As of
Election Day, the results were displayed and it was a convincing
win for Bush. Those two things together led to the rise,”
Bazdarich said.
In addition to the short-term effects Wall Street investors have
already seen, the long-term effects of the re-election may be
predicted.
Santa-Clara and fellow Anderson professor Rossen Valkanov have
studied the interaction between the Oval Office and Wall Street
have offered insight when they published “Political Cycles
and the Stock Market” in the Oct. 2003 issue of The Journal
of Finance.
The results of the study found the stock market does better
under a Democratic president than a Republican one.
“The excess return in the stock market is higher under
Democratic than Republican presidencies. … The difference comes
from higher real stock returns and lower real interest rates, is
statistically significant and is robust in subsamples,” the
paper reported.
The financial principle the study was based upon, excess return,
concerns the difference between the returns investors receive on
attractive investments compared with the returns they receive on
safe investments such as federal bonds.
Yet when asked what the next four years will look like for Wall
Street, Santa-Clara said he couldn’t really predict
anything.
“The market is a very noisy thing, and you’re bound
to be proven wrong,” he added.
By looking at Bush’s agenda and the various industries
Bush says he’d like to bolster, many investors are making
choices on what sectors to invest in.
Bazdarich has made predictions of his own and has said that
foreign trade and pharmaceutical investments will fare well.
“The Bush win will do well for free trade. … And
independent of the election, there will be a high demand for drugs.
Us baby boomers are approaching maturity and companies that sell to
that demographic are going to have a large market,” Bazdarich
added.
The agenda and proposals advocated by this presidency will
likely affect the stock market in various ways, bolstering certain
sectors, such as national defense. But predictions are just that,
and investors will have to keep on gambling on Wall Street.