Does the U.S. President Affect the Stock Market?

Abstract

Previous research shows that Democrat- and Republican-leaning investors hold different stock market expectations. In this paper, I identify a novel channel through which political opinions affect investor behavior. Instead of political affiliation, I consider nonpartisan evaluations of the executive from presidential approval rating polls. I find that large net disapproval over the U.S. president's job is followed by low stock returns, especially in times of high political uncertainty and low market-wide sentiment. Notably, this mechanism explains away Santa-Clara and Valkanov's (2003) "presidential puzzle." Overall, the findings suggest that nonpartisan political views have a substantial impact on stock prices.

Keywords: Politics; Approval ratings; Heterogeneous beliefs; Return predictability

JEL Classification: G12, G14, G18