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Will the Election Outcome Really Impact the Economy?

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Those waiting a change in the economy after the presidential election may not want to hold their breath, unless they can do it for two years. New research finds that political change produces little immediate impact.

In fact, the four business and finance professors who conducted the research found that the most-favorable returns in the stock market often are not seen until the third year of a presidency.  

Their study, based on data from 1965 through 2008, also throws some cold water on the claims of both candidates regarding their economic policies. In particular, the researchers say, the political affiliation of the winning candidate has little bearing on the performance of the stock market.  Stock returns for smaller stocks generally perform better when Democrats occupy the White House and bonds perform better with Republicans in office, they found, but political affiliation has little impact on the overall economy.

“While the party of the president garners much of the attention of the press, it appears that other factors have a much more prominent relationship with security returns,” said researcher Gerald Jensen, a professor of finance at the Northern Illinois University College of Business.

Regardless of which party held office, the study found that political harmony between the White House and Congress is good for the market. Stock indexes –  particularly those for smaller stocks  –  were 22 percent higher during times of political harmony, the researchers found.

"We have identified a relationship, but we aren’t saying that one causes the other," said Jensen, a longtime researcher of the topics covered in the study.

Investors would be wise to focus more on how the election will affect the Federal Reserve, Jensen said.

"A tightening of Fed monetary policy generally precedes poor equity market performance and increased inflationary pressures," he said. "Ultimately, that factor seems to carry the greatest weight, so that is what investors should pay attention to. While the chairman of the Federal Reserve is appointed by the president, I don’t think people pay much attention to what party he comes from. Instead they watch what he is doing.

"Perhaps they should look at politicians the same way. It’s not their party affiliations that are important, but the policies that they put forth."

The results of the research appear in the paper "What to Expect When You’re Electing," co-authored by Jensen; Scott B. Beyer, associate professor at the University of Wisconsin Oshkosh College of Business; Luis Garcia-Feijoo, assistant professor at Florida Atlantic University College of Business; and Robert R. Johnson, professor of finance at Creighton University College of Business.

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