Speculating on Presidential Success: Exploring the Link Between the Price-Earnings Ratio and Approval Ratings

Abstract

Stock markets and politics are enduring staples of dinner party conversations but surprisingly little is known about the interaction between the two. Here we present evidence for a robust relationship between a key financial measure - the aggregate price earnings ratio - and surveyed approval of the incumbent president. We argue, following the finance literature, that the price-earnings ratio represents a composite measure of investors' hopes and fears. The partially prospective nature of this ratio enables us to shed new light upon the controversy surrounding how the electorate attends to economic circumstances in judging its presidents.

Keywords: Political Economy, Price-Earnings Ratio, Presidential Approval

JEL Classification: G10, G14, P16