Research shows change in US Government has impact on stocks

Nov. 6, 2012 - PRLog -- Research undertaken by Vito gala, assistant professor of finance at London Business School and his associates Frederico Belo, University of Minnesota, and Jun Li at the University of Texas, Dallas, uncovered that the political parties in power have an effect on the stock investments. They discovered that depending upon which party is ruling i.e. Democrats or Republicans, the stocks investments show changing patterns and are consistent with their policies on investing in the respective sectors.

The high exposure industries to government spending during Democratic ruling, have included aircraft, defence and construction as well as some secondary industries such as steel and mining. The democrats with effective leadership have done more investing in these very crucial industries resulting in higher performance within game changing sectors. The lowest amount of exposure to government spending was given to the likes of the Tobacco, Alcohol and Food products industry.

Under the Democrats, these high exposure industries outperformed the low exposure industries by 6 per cent whereas under the Republicans it was quite the opposite. They underperformed by 5 per cent per year. This was observed even when research was done for Business cycles.

The collaborative research contains information from 1929 to the present. It covers the political cycles from the time when C. Hoover was president to date when Obama government is in ruling. The exposure that different industries have had to government spending from those times to current has showed an immense effect on stock. This has been valuable in giving guidance for investing opportunities, depending on which government is in power. A 7 per cent risk-adjusted return may be gained if this strategy is recruited.

It has been recommended that investors should keep an eye out on the election results as they may have a substantial effect on their investments. Future effective leadership can significantly improve investor return on investment, if they heed this advice; they can utilise this new research to get the most out of their investments.

They say: “If the Democrats win, investors should buy stocks from industries with high exposure and sell their low exposure stocks. Conversely, if the Republicans win, the strategy should be reversed. Investors should sell their high exposure stocks and buy low exposure stocks.

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Based on historical evidence, over the presidency, and particularly during the second and third year, they should see nice returns.”

The research has come to such conclusions based on historical evidence, every political cycle similar patterns are observed, and this is because each government has specific policies on the spending structure towards each industry. As these vary greatly from each other, completely different observations are witnessed. As these changes are quite slow and do not make a sudden impact it would be ideal to make a profit over this period of time. If it continues this time round, it would be an obvious route to take over the following elections in the future as well.

For more information, please visit: http://www.london.edu/programmes/executiveeducation/eol.html