Elections and stock market cycles

BusinessWorld
BY D. A. B. NEPOMUCENO

MAY 10, 2010 for sure has been marked in every Filipino’s calendar.

It is on that date when Filipinos cast their ballots to elect the country’s 15th President, who will replace nine-year termer President Gloria Macapagal Arroyo.

Aside from the political changes, investors are also on the lookout for how things will turn out in the next President’s first 100 days in office, which they said could dictate the direction of the market.

Evidently, even before it happens, equity market players have already factored the upcoming national election in their trade.

“Investors are becoming cautious in participating in the stock market, mainly because of problems arising from the new system of election,” Justino B. Calaycay, Jr. of Accord Capital Equities Corp. said.

“Right now investors are really looking at the new system of election…the credibility of the system,” he added.

Mr. Calaycay noted that investors are more concerned about what policies the next President will introduce and retain rather than who actually gets the seat.

“Naturally elections will bring out change in leadership which can mean change in policies…businessmen and investors are more concerned about policies,” he said.

Meanwhile, political dynamics have been playing a big role in the stock market’s movement for the past years especially during election period.

Uncertainties over the election result and how well the newly elected president can run the office are just some of investors’ concerns.

Presidential Election Cycle Theory

The presidential election cycle theory was developed by Yale Hirsch, chief executive officer (CEO) of The Hirsch Organization, an independent investment research and publishing organization.

The theory states that US stock markets are weakest in the year following the election of a new US president and improves after the first year of the new administration.

The cycle will start again with the next presidential election.

One reason why stock prices may decline following a presidential election is that the newly elected president takes unpopular steps to make adjustments to the economy.

According to a paper by Wing-Keung Wong and Michael McAleer entitled “Financial Astrology: Mapping the Presidential Election Cycle in US Stock Markets”, US stock prices closely followed the four-year presidential election cycle from January 1965 to December 2003.

“In general, stock prices fell during the first half of a Presidency, reached a trough in the second year, rose during the second half of a Presidency, and reached a peak in the third or fourth year,” the paper read. Read More...