The U.S. stock market surged after Donald Trump’s election on November 8, 2016, and the Dow-Jones Industrial Average (DJIA) reached the milestone of 20,000 a few days after his inauguration. Anecdotally, this seems like a strong positive reaction to Trump’s election, but how does this compare with stock market behavior after previous Presidential elections? Moreover, is this surge merely a continuation of market momentum that preceded Trump’s election?
To answer the first question, the most obvious measure is the change in stock market indices in a short period immediately after Election Day.1 We will initially consider a one-week window because this is a short enough timeframe that the Presidential election is still dominating U.S. news, but it is a long enough timeframe for investors to reflect on the news, trade stocks, and react to movements in the market. For every newly-elected2 President since World War II, we therefore calculate the one-week3 percentage gain for the two best-known U.S. stock indices, the DJIA and the S&P 500. (We omit the S&P 500 for Dwight Eisenhower because the index did not exist in its present-day form until 1957.)
Using the rightmost column in the two tables above, we sort the Presidents by how much each stock index rose:
This corroborates the anecdotal observation of an unusually strong stock market surge after Trump’s election. For one index, Trump saw the largest post-election surge since World War II, nearly a full percentage point ahead of second-place Richard Nixon; for the other index, Trump was in second place, just 0.06% behind first place.
If we graph the DJIA and S&P 500 day by day, each one shows a fairly smooth rise during the week after Trump’s election, as compared to more jagged graphs for most Presidents:
As a sanity check, we note that the two indices are highly correlated. (For Barack Obama’s data line, the two graphs might even seem identical at first glance.) For example, no President saw a rise in one index but a drop in the other. The correlation is easier to see if we graph the indices against each other; from a near-linear relationship, the only outlier is George W. Bush, and as we mentioned in footnote 2, the 2000 election was atypical because of the weeks in which its winner remained uncertain.
Next, we refine our model to exclude pre-election momentum of the market, and this will let us answer the second question. For example, if the DJIA had risen 3.22% in the one-week period before Trump’s election, then its rise by another 3.22% in the one-week period after his election would be fully explained by a pre-existing trend in the market. By contrast, if the DJIA had been falling before Trump’s election, then its rise after his election would be even more noteworthy.
To compensate for this, we take the number of points the DJIA rose in the five trading days after the election, subtract the number of points it rose in the five trading days before the election, then divide the result by the DJIA’s value on Election Day. This gives us a percentage that reflects post-election gain beyond what would be expected from pre-election momentum.
We do the same for the S&P 500:
Under this method, Trump’s percentage gains are lower; however, the fact that they are still positive suggests that the rise after his election exceeds what would be explained by pre-election market momentum. He is the first President since Ronald Reagan for whom these numbers are positive. For the DJIA, he is the second-largest gainer (after Nixon); for the S&P 500, he is the third-largest gainer.
Once again, our sanity check confirms that any President who had a positive value for one stock index had a positive value for the other index as well.
Next we examine the market’s post-election behavior over a longer period. Instead of a week, let us consider a month. (We rigorously define this as 21 trading days: in recent years, that corresponds to 30 calendar days, keeping in mind that U.S. markets close for Thanksgiving.4) First, we determine the percentage gain for each index:
If we sort by the final column in each table, we note that Trump saw by far the largest 21-day gain for the DJIA, as well as the second-largest 21-day gain for the S&P 500:
Lastly, we compensate for pre-election market momentum by reiterating our earlier method, this time for a period of 21 trading days in each direction:
The results show that when we compensate for pre-election market momentum, Trump had the largest one-month gain in both the DJIA and the S&P 500, the former by an extraordinary margin over second-place Reagan. This confirms that the rally in the month after Trump’s election far exceeds what one would have extrapolated from pre-election market behavior.
In summary, we have reviewed all eight combinations of the following: DJIA or S&P 500; one-week timeframe or one-month timeframe; and raw percentage or percentage compensating for pre-election market momentum. In all eight measures, Trump’s post-election rally reflected one of the largest gains since World War II, and in four of them, it had the largest gain since World War II. Our anecdotal observation that the recent stock rally seems unusually strong is therefore confirmed. We summarize our findings in a final table, where each cell conveys a gain percentage and its ranking among the post-election periods reviewed:
At the risk of stating the obvious, this post-election bull market reflects investors’ confidence in the Trump Administration before Trump has had a chance to put his policies into effect. It therefore reflects expectations, not impact.5
1. The stock market rally following Trump’s election was unusually strong. By four of the eight measures we reviewed, it was the strongest rally for any newly-elected President since World War II.
2. This stock market rally cannot be attributed to pre-election market momentum.
1. Our baseline is the closing price on the last trading day when the winner of the Presidential election was not yet known. From 1984 onward, this has been Election Day itself because the markets close before even the earliest states have closed their polls. From 1932 to 1980 inclusive, Election Day was a market holiday, so our baseline for Eisenhower through Reagan is the closing price on the day before Election Day. The winner of any Presidential election is not officially certain until weeks after Election Day, given the possibility of faithless electors, recounts, or rejected certifications; nonetheless, with the exception of 2000, the winning candidate has been known with near-certainty before the start of the following trading day. In the 2000 election, the winner remained truly unclear until the Supreme Court decision in Bush v. Gore was announced at 12:10 PM on December 12, so that year’s baseline is taken as the closing price on December 11, 2000; however, this long-delayed result is so atypical that the results for 2000 should be treated with caution.
2. We ignore the re-elections of incumbents because these are not directly comparable to the election of a new President. Moreover, markets have already had years to react to their Presidencies, so unless the incumbent remaining in office is a big surprise—true only for Harry Truman in 1948—we do not expect to see interesting behavior. Trump’s win, like Truman’s, was a dramatic upset, so it is not surprising that overseas markets, caught off-guard, were briefly roiled on the night when it became clear that Trump had defeated Hillary Clinton.
3. We rigorously define this as five trading days. Normally, this period ends one calendar week after Election Day. The two exceptions are 1952 (when Veterans Day was a market holiday) and 1968 (when Wall Street had four-day trading weeks due to a paperwork crisis).
4. For 1952, we also take into account the fact that Veterans Day was a market holiday, and when we later work backwards to compensate for pre-election momentum, we will take into account the market closure on Columbus Day. For 1968, we take into account four-day workweeks due to the paperwork crisis, which has the effect of pushing “one month” before Election Day all the way back to September. Specifically, in our timeframe of interest, the New York Stock Exchange was closed in 1968 on October 2, 9, 16, 23, 30; November 11, 20; and December 4.
5. While political actors such as the President and Congress may occasionally have some discernible impact, few political myths are sillier than the idea that the President controls the economy and should receive the credit or blame whenever it does well or poorly. For example, the dot-com bubble of the late 1990s and the resulting stock market crash would have occurred regardless of whether Bill Clinton or Bob Dole was President at the time, and this boom-bust cycle dwarfed any economic impact from political actors. The myth moves from silly to disingenuous when people cherry-pick indicators for reasons of partisanship: praising a President they like on the grounds that gas prices are low, criticizing a President they dislike on the grounds that inflation rates are high.
For DJIA closing prices, we used https://measuringworth.com/DJA/.
For S&P 500 closing prices, we used https://finance.yahoo.com/quote/%5EGSPC/history?p=%5EGSPC from 1960 to 1992 and http://quotes.wsj.com/index/SPX/historical-prices from 2000 to 2016. While it may appear to be an error in the table, it is actually a historical quirk that the S&P 500 had exactly the same value (103.10) on the eve of Nixon’s election as on the eve of Carter’s election.
Our source for dates of market closures was http://www.tradingtheodds.com/nyse-full-day-closings/. This website has a remarkably user-friendly interface that encourages browsing. For example, it allows the user to discover that the New York Stock Exchange has closed for the funerals of only three people other than U.S. Presidents: Vice President Garret Hobart, Vice President James Sherman, and Queen Victoria.
© 2017 by Quiznox.com