Election Effect on Stock Market – Term Paper

Election effect on market

Do the results of federal elections have an effect on stock prices?

Introduction

Regulated by the federal election commission, the federal election is an important and compulsory procedure that allows the citizen to exercise their democratic rights by voting leaders of their choice to parliament and other offices in the government. The members of parliament elected by the people are responsible for making law decisions on behalf of the individuals and to ensure that policies are implemented on the interests of everyone in the country (Stratmann  & Verret, 2015). Every eighteen-year-old citizen has the right to vote, and it is also paramount that on the elections day, the registered voters attend the polling stations either physically or vote by mail.

Federal elections allow the citizens to elect members of parliament who represent the people interests both in the Senate and in the House of Commons. Elections are held after every four years, and it is the role of the head of state to determine the date of the elections. There are two major parties that support their candidates for the presidential positions in the United states, the Democrats and the Republican party. Prior to elections, a presidential debate is held during which the candidates are allowed to explain their manifestoes to the people.  However, in cases of death, incapacitation or resignation of a member of parliament, then a by-election is held (Faas, 2015).

During every federal election, investors have to figure out the outcomes of the procedure to the stock market. It can be argued federal elections have direct impacts on the results of the stock market returns. The presidential cycle is one element of the federal elections that determines the stock market income. Every president has their opinions and methods of running the stock market. For instance, during the first two years of President Obama’s tenure in office, the value of the stock market rose by 27% (Cross, 2016).  Also, the sense of belonging, that is, being democratic or republican is also an effect in the stock market. The Democrats have better value for stocks and every time they are in power; the value rises by nine percent every year. This is high than the six percent increase that is seen when the Republican are in control of the government. Thus, it is evident that federal elections have direct impacts on the stock prices.

Literature Review

How does election affect stock market?

The Outcomes of Elections and Returns of the Financial Market

This article investigates that relationship that exists between the outcomes of the federal elections and the expected variations and volatilities that are bound to emerge in the Canadian bonds, money, currency value and equity (Chrétien & Coggins, 2009).  There are few pieces of evidence to show that investment opportunities are not the same in the majority parliament if compared to the minority parliament. Similarly, liberal government and the conservatives have different investments opportunities especially after taking control of the government and controlling the economy of the state.

For the last two years, the equity market has performed better during the electoral process if compared to other periods in the state. This is so much consistent with the theory of strategic election planning that the government aims at achieving every election year. Furthermore, this consistency is also witnessed in the United States of America. The spill hypothesis in America is better than that of the Canadian stock price (Chrétien & Coggins, 2009).

The opportunities for equity investments in America are also better, and it has been realized that the Democrats offer the best opportunities that the Republican when they are in power. In any presidential cycle, the Democrats create more opportunities and the stock price, therefore, rise every election year and thereby improving the economy of America and the people in the states. There is, however, no apparent difference in the risks accounts that exists in the variations of returns (Chrétien & Coggins, 2009).

The Impacts of Political Improbability

This article shows how the uncertainty of the political elections can affect corporate investments and stock prices. It has been realized that a year before elections and year after the elections periods investments in the stock market usually goes down by almost by forty percent if compared to the non-elections years. Elections outcome tend to scare away investors who fear the incoming government may not favor their business interests. Also because elections year people invest less regarding product productions and service provision, investors choose to stay quiet during this period (Durnev, 2010).

According to Durnev (2010), the decrease witnessed in the investments and stock prices during the election period may be attributed to stock prices falling in their rates of being informative as people’s focus mainly on the elections. Further, in situations where the results are not predictable to the investors, then the prices may drop by a much larger margin. In countries where corruption is high, then the elections may cause inefficient capital allocation that will eventually reduce the performance of the company.

Stock market response to presidential elections

Reactions of the Stock Market to Political Occasions

The prices of the stock market depend on which political party that comes into power. Parties have different manifestoes, especially those that control the economy of the state. This can be illustrated by the variations in the prices of the stock market when power moves from one political party to the next (Milyo, 2012).

However, opposing the public opinion, event research does not show that the ability of the political parties to have strong campaign strategies can enhance the value of the stock prices to companies (Milyo, 2012). Personal and geographic connections with the political parties may give opportunities for the companies to sell their shares at relatively high values.

Stock market and Political Cycle

Political cycles are determinants of the value of the stock. The value of the stock market is directly proportional to the political cycles. There are variations and results from the political cycle that have direct effects on the value of the stock exchange. Regressions, tests of equality and the GARCH models are among the methods that can be used to determine the actual nature of the political cycles and its impacts on the stock market. According to Celis and Shen, (2016), the absence of political cycles raises the value of the stock market. This is because it boosts the investors’ confidence in the system and they are encouraged to invest in the available market opportunities.

Also, the absence of political cycles makes the investors treat government as part of their doing, and they can thus associate with the government and invest more having security guarantee of their stock in the market. On the other hand, the presence of political cycles changes the information system between the government and the investors. With difficulty in communication, investors may opt to exit the market and thus to raise the prices of the stock in the market (Celis & Shen, 2016).

How will election affect the stock market

Market Returns and Political Elections

Politics and elections significantly affect the incomes and prosperity of any country which eventually affect the operations in its stock market. This is because voters in most cases elect people and parties that will represent their personal interests and beliefs in the government. Menge (2013) says that elections determine the outcome of corporate performance by influencing a country’s specific sectors or the overall economy of the country. Some of the sectors that are commonly affected b elections are the regulatory environment and business policy making that have direct links with the prices in the stock market. People elected in government offices may also have a personal interest in investing in the stock market and therefore may directly raise or lower the prices to favor them. For instance, in situations thy feel that the prices are too low and many people are coming into the market, they may decide to raise the prices to control the number of individuals coming into the market and consequently make more profits. Also, in situations that they feel the prices are too high, and the business is not doing as they had anticipated, they may decide to lower the prices so that more people can buy the shares and raises their profit margin.

The government, through the minister of trades, can also determine the prices of the stocks in the market. Menge (2013) argues that the government controls the prices of shares by enacting policies that encourage or prevent investors from doing certain forms of business activities in the country. For instance, in a situation that the government feels that foreign investors are taking over their stock market, it may come with policies that are meant to scare away the foreign investors but encourage local investors to invest in the stock market.

Market reaction to presidential elections

Purpose Statement

The aim of the research is to determine how the results of federal elections have an effect on stock prices.

Hypothesis

Federal elections have direct impacts on the results of the stock market returns and the prices of the stock.

Method

i.        Subjects- the targeted groups for this research will be business people and government officials in the stock market. Business people are the primary subjects since they understand how business income varies with the electoral process. They know when to expect good returns and when to expect small (Lewis, 2015). Possible by including the in the study, it may be easy to relate the impacts of elections on the cost of goods and services and eventually on the stock prices. On the other hand, the government has direct control on the stock market and therefore by including the officials in the research it may be easy to obtain previous market records that indicate how the market prices vary will elections.

ii.      Procedure- the participants will be contacted in advance and informed on the aims and objectives of the research. Contacting them early is meant to prepare them psychologically and make them ready to share any form of information that may assist the research its objectives. A date will be set to meet with the participants, once they avail themselves, they will be given an overview of the procedure. This will then be followed by giving them questionnaires that they will be expected to fill within a stated period. Once they are done, they will be engaged in a one-on-one interview where they will be expected to clarify some of the answers they may not be comprehensive in the questionnaires. The study will also involve going through previous records and information (Kratochwill & Levin, 2015).  This will mean going to the national library and using the internet to retrieve some online articles that explains the impacts of federal elections to stock prices.

iii.    Data Collection Instruments- The data collection instrument that is to be used includes questionnaires, interviews, surveys, lab experiments, observation, previous records and distribution records in various digital culture (Lewis, 2015).

iv.    Analysis- for easy analysis, the study will be designed using e a mixture of descriptive and experimental forms of models. The experimental design involves a series of practicals and procedures that will be conducted. Through this, it will be easy to control all the factors that will affect the final results of the experiment. Experimental research is easier to use because it allows for the comparison of results and also ensures consistency. It also gives the ability to control the number of alternative explanations that may lead any form of bias of the final performance. The data test that will be used are descriptive statistics tests and inferential statistics tests. While the first one involves determination of mean, median, skewers and dispersion of the data obtained, the latter involves using a hypothesis.

References

Cross, W. (2016). The Importance of Local Party Activity in Understanding Canadian Politics: Winning from the Ground Up in the 2015 Federal Election: Presidential Address to the Canadian Political Science Association Calgary, 31 May 2016. Canadian Journal of Political Science/Revue canadienne de science politique, 1-20.

Faas, T. (2015). The German Federal Election of 2013: Merkel’s Triumph, the Disappearance of the Liberal Party, and Yet Another Grand Coalition. West European Politics, 38(1), 238-247.

Kratochwill, T. R., & Levin, J. R. (Eds.). (2015). Single-Case Research Design and Analysis (Psychology Revivals): New Directions for Psychology and Education. Routledge.

Lewis, S. (2015). Qualitative inquiry and research design: Choosing among five approaches. Health promotion practice, 1524839915580941.

Menge, R. N. (2013). Effect of elections on stock market returns at the Nairobi securities exchange (Doctoral dissertation, University of Nairobi).

Stratmann, T., & Verret, J. W. (2015). How Does Corporate Political Activity Allowed by Citizens United v. Federal Election Commission Affect Shareholder Wealth?. J. Law & Econ., 58, 545-717.