Skip to main content
SpringerLink
Log in

Speculating on presidential success: exploring the link between the price–earnings ratio and approval ratings

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

Stock markets and politics are enduring staples of dinner party conversations but surprisingly little is known about the interaction between the two. Here we present evidence for a robust relationship between a key financial measure—the aggregate Price–Earnings ratio—and surveyed approval of the incumbent president. We argue, following the finance literature, that the price–earnings ratio is a composite measure of investors’ hopes and fears. The partially prospective nature of this ratio enables us to shed new light upon the controversy surrounding how the electorate attends to economic circumstances in judging its presidents.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. A ‘politically correct’ investment strategy is one that favours small cap stocks during Democratic presidencies and large cap stocks or government bonds during those in which the incumbent is Republican.

  2. Several recent papers have questioned the existence and strength of these stock market anomalies (see for example Jones and Banning 2009; Bialkowski et al. 2007 and Powell et al. 2007).

  3. Calculated from 2007 data of Historical NYSE Group Volume available at http://www.nyse.com/financials/1143717022567.html, last accessed 11 December 2008.

  4. For example, in the UK such appears in, inter alia, The Times, The Financial Times, The Daily Telegraph, The Guardian, and The Daily Mail.

  5. Quarterly data is available in consistent form from around 1950. It is not until much later in the series that consistent monthly data becomes available.

  6. The complete data series, along with further definitions, is available at Professor Shiller’s webpage: http://www.econ.yale.edu/~shiller/data.htm.

  7. We are grateful to one of the anonymous reviewers of this paper for suggesting this approach which delivers a superior specification to that we had originally employed by treating the two contributors to the Discomfort_Index separately.

  8. A simple introduction to GARCH models can be found in Johnston and DiNardo (1997). For those seeking a more in depth treatment, we would recommend Greene (2000).

  9. We have also conducted Augmented Dickey-Fuller tests on the residuals from our regressions specified in levels. The tests included a constant and a time trend, and lag length was selected using Akaike Information Criterion with the maximum lag length set at L=4. The tests strongly rejected the null hypotheses of the existence of unit root in the residual series.

References

  • Akaike H (1974) A new look at the statistical model identification. IEEE Trans Automat Contr 19(6):716–723

    Article  Google Scholar 

  • Arrow KJ, Forsythe R, Gorham M, Hahn R, Hanson R, Ledyard JO, Levmore S, Litan R, Milgrom P, Nelson FD, Neumann GR, Ottaviani M, Schelling TC, Shiller RJ, Smith VL, Snowberg E, Sunstein CR, Tetlock PC, Tetlock PE, Varian HR, Wolfers J, Zitzewitz E (2008) The promise of prediction markets. Science 320:877–878

    Article  Google Scholar 

  • Bajaj V, Bradsher K (2009) Developing markets in bloom again. The New York Times, June 4

  • Basu S (1977) Investment performance of common stocks in relation to their price–earnings ratios: a test of the efficient market hypothesis. J Finance 32(3):663–682

    Article  Google Scholar 

  • Bialkowski J, Gottschalk K, Wisniewski TP (2007) Political orientation of government and stock market returns. Appl Financ Econ Lett 3(4):269–273

    Article  Google Scholar 

  • Booth JR, Booth LC (2003) Is presidential cycle in security returns merely a reflection of business conditions? Rev Financ Econ 12:131–159

    Article  Google Scholar 

  • Clarke HD, Stewart MC (1994) Prospections, retrospections and rationality: the bankers model of presidential approval reconsidered. Am J Polit Sci 38:1104–1123

    Article  Google Scholar 

  • Cutler DM, Poterba JM, Summers LH (1989) What moves the stock market? J Portf Manag 15:4–11

    Article  Google Scholar 

  • Davidson R, MacKinnon J (1989) Testing for consistency using artificial regressions. Econom Theory 5(3):363–384

    Article  Google Scholar 

  • Davidson R, MacKinnon J (1993) Estimation and inference in econometrics. Oxford University Press, New York

    Google Scholar 

  • Erikson RS, MacKuen MB, Stimson JA (2000) Bankers or peasants revisited: economic expectations and presidential approval. Elect Stud 19:295–312

    Article  Google Scholar 

  • Fama EF, French KR (1992) The cross-section of expected stock returns. J Finance 47(2):427–466

    Article  Google Scholar 

  • Federal Reserve Board (2007) Survey of consumer finances, available at http://www.federalreserve.gov/PUBS/oss/oss2/2007/scf2007home.html. Last accessed 17th June 2009

  • Frey BS, Schneider F (1978) An empirical study of politico-economic interaction in the United States. Rev Econ Stat 60(2):174–183

    Article  Google Scholar 

  • Golden DG, Poterba JM (1980) The price of popularity: the political business cycle reexamined. Am J Polit Sci 24(4):696–714

    Article  Google Scholar 

  • Gordon MJ (1962) The investment, financing, and valuation of the corporation. Irwin, Homewood

    Google Scholar 

  • Greene WH (2000) Econometric analysis, 4th edn. Prentice Hall, New York

    Google Scholar 

  • Grimmett RF (2008) Instances of use of United States Armed Forces abroad, 1798–2007. CRS Report for Congress RL32170

  • Gronke P, Brehm J (2002) History, heterogeneity, and presidential approval: a modified ARCH approach. Elect Stud 21:425–452

    Article  Google Scholar 

  • Grossman M (2003) Political corruption in America: an encyclopedia of scandals, power and greed. ABC-CLIO, Santa Barbara

    Google Scholar 

  • Hahn J, Hausman JA, Kuersteiner GM (2004) Estimation with weak instruments: accuracy of higher-order bias and MSE approximations. Econom J 7(1):272–306

    Article  Google Scholar 

  • Halcoussis D, Lowenberg AD, Michael Phillips G (2009) The Obama effect. J Econ Finance 33:324–329

    Article  Google Scholar 

  • Hamilton JD (1994) Time series analysis. Princeton University Press, Princeton

    Google Scholar 

  • Harvey AC (1980) On comparing regression models in levels and first differences. Int Econ Rev 21(3):707–720

    Article  Google Scholar 

  • Hensel CR, Ziemba WT (1995) United States investment returns during democratic and Republican Administrations, 1928–1993. Financ Anal J 51:61–69

    Article  Google Scholar 

  • Herbst AF, Slinkman CW (1984) Political–economic cycles in the U.S. stock market. Financ Anal J 40:38–44

    Article  Google Scholar 

  • Hibbs DA Jr, Rivers D, Vasilatos N (1982) On the demand for economic outcomes: macroeconomic performance and mass political support in the United State, Great Britain, and Germany. J Polit 44(2):426–462

    Article  Google Scholar 

  • Historical tables: budget of the United States Government (2008) Executive Office of the President of the United States Washington, U.S. Government Printing Office. Available online at http://www.whitehouse.gov/omb/budget/fy2008/pdf/hist.pdf. Last accessed 14 December 2008

  • Johnston J, DiNardo J (1997) Econometric methods, 4th edn. McGraw Hill, New York

    Google Scholar 

  • Jones ST, Banning K (2009) US elections and monthly stock market returns. J Econ Finance 33:273–287

    Article  Google Scholar 

  • Kane A, Marcus AJ, Noh J (1996) The P/E multiple and market volatility. Financ Anal J 52:16–24

    Article  Google Scholar 

  • Kenski HC (1977) The impact of economic conditions on presidential popularity. J Polit 39(3):764–773

    Article  Google Scholar 

  • Kernell S (1978) Explaining presidential popularity. How ad hoc theorizing, misplaced emphasis and insufficient care in measuring ones variables refuted common sense and led conventional wisdom down the path of anomalies. Am Polit Sci Rev 72(2):506–522

    Article  Google Scholar 

  • Key VO Jr (1964) Politics, parties and pressure groups, 5th edn. Thomas Crowell, New York

    Google Scholar 

  • Lewis-Beck MS, Stegmaier M (2000) Economic determinants of election outcomes. Annu Rev Pol Sci 3:183–219

    Article  Google Scholar 

  • Lim P (2009) This rally may need a new source of fuel. The New York Times, June 14

  • Lintner J (1965) The valuation of risky assets and the selection of risky investments in stock portfolios and capital budgets. Rev Econ Stat 47(1):13–37

    Article  Google Scholar 

  • MacKuen MB, Erikson RS, Stimson JA (1992) Peasants or bankers? The American electorate and the US economy. Am Polit Sci Rev 86:591–611

    Google Scholar 

  • MacKuen MB, Erikson RS, Stimson JA (1996) Comment [on ‘Presidents and the prospective voter’]. J Politics 58(3):793–801

    Google Scholar 

  • Monroe KR (1978) Economic influences on presidential popularity. Public Opin Q 42(3):360–369

    Article  Google Scholar 

  • Mossin J (1966) Equilibrium in a capital asset market. Econometrica 34(4):768–783

    Article  Google Scholar 

  • Mueller JE (1970) Presidential popularity from Truman to Johnson. Am Polit Sci Rev 64(1):18–34

    Article  Google Scholar 

  • Ostrom CW, Simon DM (1985) Promise and performance: a dynamic model of presidential popularity. Am Polit Sci Rev 79:334–358

    Article  Google Scholar 

  • Nikbakt E, Polat C (1998) A global perspective of P/E ratio determinants: the case of ADRS. Glob Financ J 9(2):253–267

    Article  Google Scholar 

  • Nordhaus WD (1975) The political business cycle. Rev Econ Stud 42:169–190

    Article  Google Scholar 

  • Norpoth H (1996) Presidents and the prospective voter. J Polit 58(3):776–792

    Article  Google Scholar 

  • Powell JG, Shi J, Smith T, Whaley RE (2007) The persistent presidential dummy. J Portf Manage 33(2):133–143

    Article  Google Scholar 

  • Ramcharran H (2002) An empirical analysis of the determinants of the P/E ratio in emerging markets. Emerg Markets Rev 3:165–178

    Article  Google Scholar 

  • Santa-Clara P, Valkanov R (2003) The presidential puzzle: political cycles and the stock market. J Finance 58(5):1841–72

    Article  Google Scholar 

  • Shamsuddin AFM, Hillier JR (2004) Fundamental determinants of the Australian price–earnings multiple. Pac-Basin Finance J 12:565–576

    Article  Google Scholar 

  • Sharpe WF (1964) Capital asset prices: a theory of market equilibrium under conditions of risk. J Finance 19(3):425–442

    Article  Google Scholar 

  • Shiller RJ (1981) Do stock prices move too much to be justified by subsequent changes in dividends? Am Econ Rev 71(3):421–436

    Google Scholar 

  • Shiller RJ (1989) Market volatility. MIT, Cambridge

    Google Scholar 

  • Shiller RJ (2000) Irrational exuberance. Princeton, Princeton Paperbacks

    Google Scholar 

  • Securities Industry and Financial Markets Association (SIFMA) (2008) Research Report October 16 2008, New York: SIFMA. Available online at http://www.sifma.org/research/pdf/RRVol3-9.pdf. Last consulted 11 December 2008

  • Smith T (1992) Accounting for growth. Century Business, London

    Google Scholar 

  • Stimson JA (1976) Public support for American Presidents: a cyclical model. Public Opin Q 40:1–21

    Article  Google Scholar 

  • Zarowin P (1990) What determines earnings–price ratios: revisited. J Account Audit Financ 5:439–457

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Management, University of Leicester, Ken Edwards Building, University Road, Leicester, LE1 7RH, UK

    Tomasz Piotr Wisniewski

  2. School of Management & Centre for Philosophy and Political Economy, University of Leicester, Ken Edwards Building, University Road, Leicester, LE1 7RH, UK

    Geoffrey Lightfoot & Simon Lilley

Authors
  1. Tomasz Piotr Wisniewski
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Geoffrey Lightfoot
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Simon Lilley
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Geoffrey Lightfoot.

Additional information

Simon Lilley would like to acknowledge the support of the University of Leicester’s sabbatical scheme. We are also grateful to Katrin Gottschalk, Emmanuel Haven, Barry O’Grady, Emmanuel Pikoulakis, participants at the 16th Annual Conference of the Multinational Finance Society, the journal editor and anonymous reviewers for their helpful comments and suggestions. The authors retain the responsibility for all remaining errors.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Wisniewski, T.P., Lightfoot, G. & Lilley, S. Speculating on presidential success: exploring the link between the price–earnings ratio and approval ratings. J Econ Finan 36, 106–122 (2012). https://doi.org/10.1007/s12197-009-9116-0

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s12197-009-9116-0

Keywords

JEL Classification

Search

Navigation