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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Thursday, October 08, 2020

US Presidents - Impact on SPX Returns & Volatility

by Century Financial in Investment Insights

US Presidents - Impact on SPX Returns &...
US Presidents – Impact on SPX Returns & Volatility

*This performance is only observed with historical backtests and not traded by the company.

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

The flyer attempts to analyze the performance of SPX index & its volatility under different US Presidents. Accordingly, the statistics and corresponding analysis are given for Democrats and Republicans. The SPX data & US Presidential tenures have been taken from the year 1957 (SPX Index Creation Year) – September, 2020. Key summary along with table that contains the statistics is as given below.

Summary
  • Will History Repeat Itself? Last 3 Presidents - Democratic Bill Clinton, Republican George Bush & Democratic Barack Obama got elected for 2nd term as well.
  • History is so far in Republican's favor with 3 of its presidents getting elected for 2nd term as compared to 2 presidents for Democrats.
Key Observations on SPX Returns
  • Since 1957, Democratic Presidents have served for a total of 28 years. Republican Presidents, on the other hand, have served for a total of 36 years including President Trump's current term.
  • SPX has performed better under Democratic Presidents. Total SPX Returns under Democrats have been 327.80%. Under Republican Presidents, the total returns have been 204%.
  • However, the returns are skewed in the sense that major market crashes/bubble bursts have happened during the tenure of Republican Presidents. For instance, the 2008 GFC impacted returns under Republican President George Bush(Jr). Similarly, President Nixon's horrific second term return of -47.91% was primarily on account of high inflation & oil crisis that took place during 1973 - 1974.
  • For Democratic Presidents getting elected for 2nd term, the returns have been higher for 2nd term as compared to 1st term.
  • For Republican Presidents, the returns for 2nd term have been much worse than 1st term (2/3 instances).
Key Observations on SPX Volatility
  • Average Annualized Volatility under Republican President is 15.52%.
  • Average Annualized Volatility under Democratic President is 13.39%.
  • For Republican Presidents elected for 2nd term, the average volatility for 2nd term has increased as compared to 1st one.
  • Current year's annualized volatility under Republican President Trump is set to surpass 2008 volatility (2020 YTD Volatility @ 33.53% v/s 2008 volatility of 41%)
Data Duration & Calculation Methodology
  • Data Duration: 1st April, 1957 – 30th September, 2020.
  • For uniformity, a complete year starting from January to December is taken into consideration. For instances where the US President has assumed office from September/October of a year, the data for returns & volatility calculation are taken from the starting of next year i.e. from January next year.
  • For volatility calculation, daily volatility is annualized in order to get a holistic view of the volatility. Number of days for this calculation is as per the number of trading days in that particular year.
US Presidents – Impact on SPX Returns & Volatility
Presidential Term Year Average Annualized Volatility - 1st Term Average Annualized Volatility - 2nd Term 1st Year SPX Returns Post Election - 1st Term 1st Year SPX Returns Post Election - 2nd Term 1st Term SPX Total Returns 2nd Term SPX Total Returns
Sr No President Party
1 Dwight D. Eisenhower Republican 1957 1958 1959 1960 10.12% -9.40% 32.52%
2 John F. Kennedy Democratic 1961 1962 1963 11.04% 24.28% 32.88%
3 *Lyndon B. Johnson Democratic 1964 1965 1966 1967 1968 8.14% 12.36% 37.32%
4 **Richard M. Nixon Republican 1969 1970 1971 1972 1973 1974 10.87% 18.84% -11.42% -18.09% 15.78% -47.91%
5 ***Gerald R. Ford Republican 1975 1976 13.32% 28.42% 46.64%
6 Jimmy Carter Democratic 1977 1978 1979 1980 12.27% -11.12% 31.27%
7 Ronald Reagan Republican 1981 1982 1983 1984 1985 1986 1987 1988 14.54% 18.56% -10.11% 26.36% 23.13% 55.40%
8 George Bush Sr. Republican 1989 1990 1991 1992 13.27% 27.26% 51.51%
9 Bill Clinton Democratic 1993 1994 1995 1996 1997 1998 1999 2000 9.52% 19.69% 7.06% 31.01% 59.09% 67.06%
10 George Bush Jr. Republican 2001 2002 2003 2004 2005 2006 2007 2008 18.89% 19.33% -13.04% 3% -1.03% -18.30%
11 Barack Obama Democratic 2009 2010 2011 2012 2013 2014 2015 2016 20.33% 12.76% 23.49% 29.60% 49.92% 50.26%
12 Donald Trump Republican 2017 2018 2019 2020 17.42% 18.74% 46.24%

*For Lyndon Johnson, includes partial term of 1 year & 2 months. Assumed Presidency following assasination of JFK

**For Richard Nixon, he could only serve partial term of 2 year out of his complete 2nd term tenure of 4 years. He had to resign due to Watergate Scandal

*** For Gerald Ford, he could only serve for 2 years as other 2 previoys years were served by Richard Nixon. When Nixon had to resign due to Watergate scandal, Gerald Ford (the then Vice President) automatically qualified to become US President

*Past performance is not indicative of and does not guarantee future results. Trading in markets may involve loss of capital.

Risks & Assumptions

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The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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