Rob Arnott – Links Between U.S. Stock Returns And U.S. Presidents Are Bogus

Johnny HopkinsRob ArnottLeave a Comment

A new report released by Rob Arnott and the team at Research Affiliates shows that investors should exercise extreme caution when interpreting historical investment data as it relates to politics.

Here’s an except from that report:

Our results underscore the importance of exercising caution when interpreting historical investment data, including as it relates to politics.  As Harvey, Liu, and Zhu (2015) stress, the large number of ways in which the data can be analyzed in conjunction with the vast number of studies undertaken, opens the door to the discovery of spurious relations. The problem is compounded by the fact that political data are likely to be nonstationary. The claim that the left or right party has come to power can mean different things at different times or in different countries. In addition, the meaning of being “left” or “right” can depend on a number of factors such as the country in question, issues at stake, campaign positions of the opposing parties, and even the personalities of the candidates.

The international results we report here are consistent with the hypothesis that the correlation between US stock returns and US presidential elections, though dramatic, is spurious. Although US stock returns have been much higher when the left party was in power, this finding appears to be unique to the United States. The fact that the result is country specific, in combination with the observation that the US result is driven largely by two key observations associated with major market crashes, leads us to conclude that no persuasive relationship exists between the political party in power and stock returns.

You can read the full report here.

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