Politics & Markets

Visualizing History

IMPORTANT NOTE

The chart below demonstrates the return from “Pre-Election Close to Post-Election Close”, but gives you a great sense of the immediate reaction to a new President.

From the Archives

Benner’s Prophecies of Future Ups and Downs in Prices (1884)

There have been market predictions since markets first existed. Almost all predictions are wrong, but it is interesting to read those of a man named Samuel Benner, who authored books that sound more like a fortune tellers guide than an investment book. For example, the book linked this week is titled:

“Benner’s Prophecies of Future Ups and Downs in Prices: What Years to Make Money on Pig-Iron, Hogs, Corn, and Provisions”

Sunday Reads

While it hasn’t ever really subsided in recent years, politics is starting to really dominate the headlines in recent weeks. If you live in the United States, you have probably heard the word ‘impeachment’ approximately 487,000 times this week, as the Senate prepares to hold opening arguments in the impeachment of President Donald Trump next Tuesday. In addition, there was a testy Democratic debate earlier in the week, and the first caucus in Iowa is quickly approaching.

So! No matter your political views, this is an opportunity to get some historical context. There is no shortage of investment commentary written about how ‘X’ election will cause the stock market to do ‘Y’. In the long run, though, should we ignore these predictions, or do politics really have a meaningful impact on markets? Well, just as last week’s Sunday Reads was dedicated to War & Financial Markets, this week we are going to do a deep dive on Politics & Markets.

The Stock Market and the Impeachment of Andrew Johnson

As we all know, this is not America’s first rodeo with impeachment hearings, so what happened the last time this went down? According to this article by the team at Global Financial Data:

“The failure to find Johnson guilty clearly impacted the stock market, driving it down in price while Johnson was on trial in the Senate, but rising in value as the Senate failed to remove him from office.”

Judging by the chart below, you can probably guess when the impeachment went down… (April)

The Market Impact of US Presidential Elections

Winton Capital are known for their excellent historical insights, and this has to be one of their best (and most relevant). Their research looks back at the market’s reaction to presidential elections, beginning with President Grover Cleveland in 1884. What’s really interesting is the chart below, which plots a President’s margin of victory, and the market’s returns in the previous 90 days:

The article proceeds to state:

“The cliché that Republicans are good for business/Wall Street and Democrats are the party of labour has been off the mark for a long time but still persists. It has been well documented that equity holders have enjoyed excess returns under Democratic presidents, indicating that investors have systematically under-priced Democratic policies that have benefited stocks. The instinctive preference of equity holders for Republican presidents is illustrated in Fig 2, which shows the tendency for stocks to surge upon Republican victories and decline upon Democratic victories. This is particularly the case for shock wins such as Truman’s in 1948 and Trump’s in 2016. However, such investors may be wise to reflect that the Dow Jones Industrial Average tripled under the Democratic presidencies of FDR and Bill Clinton, whilst the Republican presidents Hoover, Reagan and G.W. Bush presided over precipitous declines.”

Historical Political Futures Markets: An International Perspective

Every election season, investors are inundated with how the outcome will or will not effect markets. Like most predictions, they are often wrong. However, the idea of allocating your money based on your predicted outcome of an election is nothing new. This paper covers the long and storied history of political futures markets, with evidence of political futures markets dating back to the 16th century.

“This paper traces the operation of political futures markets back to 16th Century Italy, 18th Century Britain, and 19th Century United States. In the United States, election betting was a common part of political campaigns in the antebellum period, but became increasingly concentrated in the organized futures markets in New York City over the postbellum period.”

Even more astonishing, there have been people placing bets on the outcome of Papal succession in the Catholic Church since at least 1503.

“During the troubled papal conclave of 1549, the Venetian ambassador Matteo Dandolo observed that the Roman “merchants are very well informed about the state of the poll, and … the cardinals’ attendants in Conclave go partners with them in wagers, which thus causes many tens of thousands of crowns to change hands.” Odds were offered not only on which candidate among the papabile would win but also on when the conclave would end. About two months into this long and conflict-filled process, the market odds were 10 to 1 (implying a probability of approximately 9 percent) that this conclave would never elect a pope. Aversion to such activities eventually led Pope Gregory XIV, in March 1591 to ban on pain of excommunication all betting on the outcome of papal elections, the length of the papal reign, or the creation of cardinals.

Gregory XIV’s threat pushed wagering over papal succession underground, but at times it resurfaced. As a 1878 New York Times article noted: ‘The deaths and advents of the Popes has always given rise to an excessive amount of gambling in the lottery, and today the people of Italy are in a state of excitement that is indescribable. Figures are picked out which have some relation with the life or death of Pius IX. Every day large sums are paid for tickets in the lottery about to be drawn.’ Betting over the successor to Leo XIII in 1903 and to Benedict XV in 1922 attracted considerable press attention.”

In terms of political bets in the United States, the 1840 Presidential Election was a standout year:

“Election betting in 1840 was carried on as never before. The 1844 contest between Henry Clay and James Polk witnessed an even greater flurry of betting. Press reports indicate more than $6 million ($138 million in current dollars) changed hands in New York in the 1844 contest between Clay and Polk.”

Lastly, there were some just straight up weird bets:

“In the United States during the 18th and 19th centuries non-financial bets were wildly popular, where the losers had to roll peanuts with a toothpick down a street, climb up a greased pole, shave their hair or make other public gestures. In 1900, there were at least a half a million such ‘freak bets’.”

Liberty Bonds and Republican Electoral Success in the 1920s

There has always been a strong link between the strength of the economy and election outcomes. The same goes for the stock market. For example, look at the two examples below, posted 100 years apart:

Trump and Harding

This fascinating article argues that the performance of Liberty Bonds had an influence on the outcome of the 1920 election, as those holding depreciated bonds blamed the Democratic party for their poor performance. As the Harding advertisement demonstrates above, the Republicans took full advantage of this situation. In conclusion, the authors find:

“We find that counties with higher liberty bond ownership rates turned against the Democratic Party in the presidential elections of 1920 and 1924. This was a reaction to the depreciation of the bonds prior to the 1920 election (when the Democrats held the presidency), and the appreciation of the bonds in the early 1920s (under a Republican president), as the Fed raised and then subsequently lowered interest rates.”