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Contact: Joe King, Office of Public Affairs
(815) 753-4299

Oct. 26, 2004

Markets don't care who is elected, NIU profs find

DEKALB, Ill—Those fretting over whether a Democrat or a Republican might be better for their 401-K may want to direct their attention to other issues, say a pair of Northern Illinois University finance professors.

 

Contrary to popular opinion, the political party of the presidents since 1937 has had little impact on financial markets, according to Scott B. Beyer and Gerald R. Jensen, co-authors of, “Don’t Worry about the Election, Just Watch the Fed.” The paper appeared in the Summer 2004 edition of the Journal of Portfolio Management. Joining them as a co-author of the piece was Robert R. Johnson, executive vice president of the Chartered Financial Analyst Institute.

 

The researchers concluded that rather than presidential political leanings, it is the influence of the Federal Reserve Bank that most impacts the markets. When the Fed loosens its monetary policy, by lowering interest rates, the markets offer up better returns, and vice versa. This happens regardless of what party controls the White House, the researchers say. Their study was the first known to have examined the impact of presidential politics on the market while controlling for Fed policy.

 

“We don’t mean to say that the person in the office, and the policies that they pursue, has no effect. Rather we are saying that historically speaking there is no systematic relationship between the party of the president and how the market has performed,” says Jensen a DeKalb resident, who has taught finance at NIU for 17 years.

 

“The president always gets too much credit or blame for how the economy performs,” says Beyer, of Sycamore, who has taught at NIU for two years. “The influence of the president’s party affiliation is miniscule compared to that of Fed policy.”

 

The paper also debunks the idea that small businesses tend to do better when one party

controls the White House and the other the legislative branch – a condition referred to as “gridlock.” Once again, the authors conclude, expansive Fed monetary policy has much more to do with whether or not small businesses thrive. Furthermore, they discovered that small businesses actually benefit most when a single party controls the legislative and executive branches.

 

The failure of researchers to take into account the monetary policy of the Fed when analyzing such issues in the past is puzzling, says Jensen, but hardly unique.

 

“Much of my research has been devoted to demonstrating that many accepted models fail to take into account monetary policy,” he says. “Practitioners in the investment community understand the importance of monetary policy, but in academic research, I think it has been a little neglected.”

 

Beyer, who had previously studied the impact of both the presidential party and gridlock on market performance, admits that he was at first surprised to see how monetary policy was actually the much larger factor at play, but he was quickly convinced.

 

“In retrospect, it makes sense. Systematically, why should the party of the president have any effect?” Beyer says. “Once we gathered the data it was easy to look back and tell the story, to see the impact of Fed policy.”

 

The bad news for whoever occupies the Oval Office next year is that the Fed is currently in a restrictive mode. If history holds true to the researchers’ findings, returns on investment are likely to be lower than average for some time.

 

Fed policy, not presidential politics, determines market returns

 

1969-2000 Performance Guide

Circumstances S&P 500 Small Cap Stocks Corporate Bonds T-Bills Inflation
Expansive Fed Policy 22.63% 26.6% 10.95% 5.66% 3.63%
Restrictive Fed Policy 04.08% 02.9% 07.19% 7.80% 6.74%
Republican Administration 11.76% 10.29% 11.77% 7.08% 5.09%
Democratic Administration 16.42% 22.71% 04.91% 5.99% 5.12%
Political Gridlock 14.19% 11.91% 11.20% 6.65% 4.49%
No Gridlock 10.47% 28.19% 00.66% 6.74% 7.75%
Note: Figures represent the mean annualized returns for each asset class.

 

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