Fed impacts markets more than party does
November 4, 2004
Two NIU finance professors have found that the United States’ stock markets are not affected by the political party in the White House at the time.
NIU finance professors Scott Beyer and Gerald Jensen wrote a paper titled “Don’t Worry about the Election, Just Watch the Fed.” The paper was published in the Journal of Portfolio Management’s 2004 edition.
In the study, the professors found that the political party controlling the White House does not affect the stock market. However, the markets do rely heavily on the monetary policy of the Federal Reserve Bank, the nation’s central bank.
“We looked at the monetary policy – if it was more restrictive, the market was down and if it was expansive, the market usually was up no matter what political affiliation the president had,” Beyer said.
The bank adjusts the monetary policy by lowering or raising interest rates to relieve the strain put on business.
“We are not saying that the president does not matter, just the political party, because presidents that are pro-business are more likely to positively affect the markets,” Jensen said.
If the president has a pro-business approach toward government, it will allow businesses to have more access to capital, and they will be allowed a better chance to thrive, Beyer said.
Beyer and Jensen also found that small businesses were affected in the same way by the country’s monetary policy.
“We found that small businesses do better when there is no dominant party controlling the executive and legislative branches of the government,” Jensen said. “Even though a dominant political party in both branches can have an effect, monetary policy is the primary [influence] on the markets.”