December 19, 2018

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The Stock Market Typically Rises After Midterm Elections. This Year Is Anything but Typical.

The Stock Market Typically Rises After Midterm Elections. This Year Is Anything but Typical.
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But why? That’s the problem with this pattern: Because presidential motivations and actions aren’t sufficiently documented, there is no conclusive explanation, though a great deal of academic work has been done on this subject, as I’ve written just before the last two midterm elections.

The main working hypothesis is a cynical one: Presidents are politicians who care overwhelmingly about their own re-election. (And to a much lesser extent, two-term presidents look to ensure the election of their successors.) They stimulate the economy — and, indirectly, the stock market — for maximum effect as their own elections grow closer, or so the theory goes.

That implies that their first year in office is the best time to make politically painful moves, which won’t hurt them in the polls later. And it follows that it’s better to gin up the economy in the second half of their tenure, starting around the midterms. If the good times are going to roll, let them roll closer to a presidential election.

Cause and effect have been difficult to prove. The one case with a smoking gun occurred, naturally enough, in the Nixon administration.

Secret White House tapes, combined with the investigations of the special prosecutor and the House Judiciary Committee, as well as efforts by private individuals and researchers, are gradually giving us a more precise view of the internal workings of the government in that era than is available for other administrations.

Thanks to those Nixon White House tapes, Burton A. Abrams, an economics professor at the University of Delaware, has shown that in 1971 and early in the 1972 election year, President Richard Nixon secretly pressured the Federal Reserve chairman, Arthur F. Burns, to expand the money supply, with the goal of ensuring Mr. Nixon’s second term.

Mr. Nixon took other actions, including the imposition of wage and price controls to curb inflation, all aimed at improving his standing in the polls. And he crushed Senator George McGovern in the presidential election of 1972.



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