Stock market political cycles in a small, two-party democracy

Abstract

Real stock market returns in New Zealand are lower when the left-leaning Labour party is in power than under National party governments, in contrast to the USA where returns are higher under Democratic presidents than under right-leaning Republicans. The difference in real stock market returns between National and Labour is not reversed even when account is taken of the effect of the US political cycle and returns on New Zealand. The results of the study therefore suggest that the presidential puzzle does not transfer directly to other countries with two similar party democracies.

Acknowledgements

We would like to thank the participants at the NZ Finance Colloquium, and in particular Ahmed Etabari, Raylene Pierce, Ed Maberley, and Martin Lally. Alistair Marsden is thanked for assistance with the data. We would also like to thank Harjeet Bhabra for helpful comments.

Notes

¹Bohl and Gottschalk (2004) examine the political cycle in 15 countries, but use a much shorter sample period than the US studies.

²Keef and Roush (2003, p. 401), make a similar argument when studying the effect of political administrations on day-of-the-week effects in foreign exchange markets. ‘A comparison of political administration and the day-of-the-week effects of a large industrial economy (USA) with those of a small agrarian economy (New Zealand) … has the potential to provide new insights into the phenomenon.’

³The New Zealand central bank was not completely independent of the government until 1989.

⁴The US stock market index is the Standard and Poor Composite Index; the stock index and US Consumer Price Index data sets are obtained from Robert Shiller's web page.