The relationship between the presidential election and stock market is statistically significant. There is a positive correlation between the two. So the significance or the relationship between these two factors can be studied using a simple t-test or a correlation test. If the policies of the existing government change, it will affect the financial decisions of the public which will result in the fluctuation of the stock market. The future of the stock market can be also predicted by analyzing the relation between these two factors, since it always shows a cyclical predictable pattern. The theory that tires to explain the relationship between stock prices and Presidential elections is called the Theory of the Presidential Election Cycle. This theory was put forward by Yale Hirsh, which was developed based on the past observations that are being following in the election cycle. Business often prospers in a stage of steady government policies and in the situation of low taxes. During the election period the policy makes give increased importance for the maintenance of stable economic policies, so naturally the stock market prospers during that years. His theory gives an idea regarding the pattern of performance of the stock market in each of the four year of term of office of the president. It is also an indicator of the existing stock market timing policy. In the first year of the presidential office, the performance of the stock market is comparatively slow or weak. It is believed that the during the first years of the presidential term, more time is spend on trying to implement his election agenda and thereby putting the pressure of the economy down. Preceding the election, an 18 months period will be so crucial to the economy and also to the stock market. The stock prices will be low since there is a dilemma the economy regarding the person to be elected. The performance will be better in the second year of a presidency. But a bearish trend is shown more during this year compared to other years. The third year of the presidential term will show an increase in the stock market and shows a stronger performance compared to all other years. The fourth year also tends to be higher than the average trend.
To explain the statistical relationship between the two in detail, first the relation between the prices and the human characteristics is explained. The human expectation usually will cause the price to fluctuate since there will be a shift in the supply and demand according to price variation. The stock prices are very sensitive and it fluctuates according to the human expectations. It is a natural process, leading to cyclical patterns between the stock price and the human behavior. The political parties will often try to influence the business cycle in order to succeed the elections. This is often coincided since the inflationary and the deflationary pressures usually follow in the course of fiscal and monetary policies. The political parties often control the economy through its physical and monetary policies. So any change or fluctuation in the fiscal and the monetary policies will affect both the timing and rigorousness of the existing business conditions and make them to fluctuate along with them. The conditions of the political parties and the share markets do not last for ever. The voters usually look forward with much expectation regarding the achievement of the newly elected president. This excitement will make the president to put forward their election agendas and will begin to introduce new programs. These new policies will usually involve more taxes and more regulations. This will increase the public spending and the stock market will slow down. This strict regulation will end after two years of the election because the government will begin to adopt more flexible and public friendly policies prior to the next election. This will lead to reduction in taxes and more liberal policies, which will make a boom in the stock market. Since there exist a correlation between the election and the stock market, more predictions can be made about the stock market and thus it could be concluded that elections Are Fertile Ground for Testing Market Soothsayers.