How governments shape market returns

Aug 04, 2006

Stock market returns under Liberal-National ministries are generally higher than returns under Labor ministries, a groundbreaking new study has revealed.

The study by Professor Andrew Worthington at the University of Wollongong’s School of Accounting and Finance, believed to be the first of its kind undertaken, examined 59 Liberal-National (and their political antecedents) and Labor ministries and 47 elections since Federation in January 1901 to December 2005.

His study tried to determine the effects of a “political cycle” in Australian monthly stock returns over the 104-year period of different governments in power. The political cycle in his study referred to the party or coalition in power, ministerial tenure and election information effects. The study employed a number of different procedures to test for a political cycle in the Australian stock market since Federation.

Professor Worthington said anecdotal evidence abounds of the link between securities markets and politics.

“In the financial media, most economic and social policy is scutinised concerning possible market reactions, while industry, consumer and other groups comment on anticipated and hoped for changes in policy. At election time, politicians are frequently accused of pork-barrelling, with firms and investors alike anticipating the heady mix of tax breaks, new consumption and production policies, assistance and subsidies, and fiscal and monetary stimulation that accompanies changes in the political party in power."

At the same time, parties are routinely pigeon-holed as pro- or anti- business and pro- or anti- investor, often reflected in some way in the flow and source of political donations and other support,” he said.

Professor Worthington said previously the analysis of political cycles in stock market returns has been almost exclusively conducted in the United States, the United Kingdom and New Zealand. In the US, for example, it is generally thought that low-taxing, low-spending, business-friendly Republican administrations should be better for markets, though a ‘presidential puzzle’ exists such that returns are sometimes found to be higher under Democratic administrations.

He said the comparison of mean returns in Australia provided some evidence to support the conjecture that nominal returns, excess returns over inflation and excess returns over interest rates depend upon the political affiliation of the ministry in power.“Throughout Australian political history, market returns, however defined, are generally higher under Liberal-National ministries than Labor ministries,” Professor Worthington said.

In nominal terms, for example, stock markets returns when Liberal-National governments are in power are about 0.0026% higher per month or some 3.2% per year.

But there is a great deal of variation. For example, while the three Whitlam ministries include the two lowest returns since Federation, the five Fraser ministries include one of the best and one of the worst. “That said there is strong evidence that the returns under Liberal-National ministries are more normally distributed and predictable than returns under Labor ministries which are characterised by volatile, extreme, and often negative, values.”

After time-variation in market risk is taken into account, returns and excess returns over inflation are still higher under Liberal-National ministries, but there is no significant variation in excess returns over interest rates between the alternative parties. This suggests most of the variation in political risk is reflected in interest rates and not equity premiums.

A copy of Professor Worthington’s paper, “Political cycles in the Australian stock market since Federation” can be viewed at the following website: Political Paper

For further information contact Professor Andrew Worthington on (02) 4221 3616.

For more information, contact:

media@uow.edu.au
University of Wollongong
Ph: (02) 4221 5942; fax (02) 4221 3128