I've been staying away from social media and energetic nightlife for a while to focus on my mental well-being. However, I haven't stopped thinking about investments and improving my professional skills. I’m so excited to finally write about this topic.
Among all the investment strategies, event-driven investing is my favourite. This might be because it involves a lot of statistical methodologies, and I have a background in statistics. Additionally, there’s no more obvious signal than a significant event to indicate that it’s time to make a move!
Today, I want to explore how U.S. presidential and midterm elections affect the performance of the S&P 500.
1. Analysing the Relationship Between Presidential Election Results and S&P 500 Performance
The first step in this analysis is to identify the presidential election dates and collect S&P 500 data. For this study, I used data spanning from 1990 to 2024.
Here’s a list of historical election dates for the United States:
· November 8, 2020 - Democratic victory under Joe Biden
· November 8, 2016 - Republican victory under Donald Trump
· November 6, 2012 - Democratic victory under Barack Obama
· November 4, 2008 - Democratic victory under Barack Obama
· November 2, 2004 - Republican victory under George W. Bush
· November 7, 2000 - Republican victory under George W. Bush
· November 5, 1996 - Democratic victory under Bill Clinton
· November 3, 1992 - Democratic victory under Bill Clinton
For convenience, I used Python to retrieve the S&P 500 data and conduct the analysis. (The code is attached at the end as usual.)
The next step is to conduct a correlation analysis. In this analysis, I use the Pearson Correlation to measure the strength of the linear relationship between election outcomes (a categorical variable, with 1 representing Democrat and 0 representing Republican) and changes in the S&P 500 index.
I created a list of election dates and outcomes (e.g., Democrat = 1, Republican = 0) and calculated the daily S&P 500 returns 30 days before and after each election date to analyse the linear relationship between them.
The Pearson correlation coefficient of 0.4497 between election outcomes and daily returns suggests a moderate positive correlation, meaning there is some relationship between the election outcome and S&P 500 daily returns.
However, to determine whether this correlation is statistically significant, we need to check p-value. If the p-value is below the threshold (typically 0.05), the correlation is statistically significant.
The p-value is around 0.26, which is significantly higher than 0.05, meaning the correlation is not statistically significant between the election results and the S&P 500 returns. The observed correlation could be due to random chance.
2. How Midterm Elections Affect S&P 500 Performance
Now I want to delve deeper into this topic. I want to know whether the S&P 500 tends to perform better in the year following midterm elections compared to non-midterm years. A midterm election in the United States is an election that occurs halfway through a president's four-year term. During midterm elections, voters elect members of Congress, including:
· All 435 seats in the U.S. House of Representatives.
· One-third of the 100 seats in the U.S. Senate.
· Various state and local offices, including governors in some states, state legislators, and other local officials.
Therefore, midterm elections can significantly affect the president’s ability to govern, as they determine the composition of Congress.
This time I start from 1950 to capture more midterms.
Then I calculate the annual return a year following each midterm.
The final step is to calculate the average annual return in non-midterm years and compare the results.
By comparing these two averages, we can determine that the S&P 500 tends to perform better in the year following midterm elections compared to non-midterm years.
In summary, although there is no statistically significant correlation between the elected party and S&P 500 returns, the market historically tends to outperform in the year following midterm elections. This phenomenon, often called the "midterm election rally," is partly due to the resolution of uncertainty and the tendency for a divided government, which the market often views positively as it can lead to policy gridlock and fewer major legislative changes that could disrupt the business environment. Therefore, midterm elections could present a favourable opportunity to enter the market.
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