February 15, 2011
Politics and the stock market are at times quite interdependent. On can very easily affect the other; this is usually a negative effect. It has be theorized that the stock market can, single-handedly, change the Presidential approval rating. Dramatic political events also help shape the returns from the stock market. Political parties, political party transitions, and the policies of these parties have a major effect on the returns from the stock market. Many studies have been conducted on the topic of political economy and also many papers have been written about it. Political economy is the study of these simple ideas and many others that are more extensive.
As Bryan Keller (2008) stated in his article Political party power and its affect on U.S. market return, “Few things cloud a person’s objectivity faster than the insertion of politics into a conversation. Simply stated, when political issues and platforms can be boiled down to bumper sticker slogans and backpack patches to bolster support, the absence of perspective and detail greatly detract from one’s ability to objectively analyze the topic at hand” (p. 1). This is a true statement when conversing about any type or category of politics; however, never is it so true as when it is concerning the topic of political economy. This is a rather broad topic and for that reason it is usually pulled apart into different classes. As Harry B. Ellis (1968) writes, in his book entitled Ideals and Ideologies, “The American economy is a gigantic, interlocking mesh of daily, hourly decisions taken by millions of men and women, acting independently of one another, motivated by their knowledge of the business conditions under which they work” (Ellis, p. 172). The basic class of political economy is the effects of politics on the stock market and conversely how the stock market affects politics. There are historically and currently numerous factor which negatively effect the United States stock market. The Merriam-Webster (2011) web site posts the definition of political economy as “The theory or study of the role of public policy in influencing the economic and social welfare of a political unit” (n.p.). This is every book and paper about political economy summed up into one short sentence. Politics and the stock market have been intertwined since the beginning, one can hardly move without the other reacting is some form. As time progresses they only become more and more interwoven into a single fabric. As Bryan Keller (2008) mentions, the common held belief is that Republicans are better for the stock market in that they lower taxes, strive for smaller government, increased free trade, fight for a stronger defense, and support more small business owners. While Democrats are worse for the stock market due to the fact they promote large entitlement programs, raise taxes, work for a larger government, increased government spending and tend to support larger corporations instead of small businesses. Despite that being the accepted way of thinking for many years, these are overly simplistic ideas and they fail to capture the actual facts (p. 1). Many political actions have effects on the stock market, and all to varying degrees. In Frank Newport’s (2009) article, entitled Presidential approval and the Dow: No clear relationship, he analyzes data gathered from Gallup polls and compares these to the Dow Jones Industrial Average (p. 1). According to the Gallup (2011) web site, “Gallup polls aim to represent the opinions of a sample of people representing the same opinions that would be obtained if it were possible to interview everyone in a given country” (n.p.). These polls are examined by experts all over the world to track many different indexes. As defined by the Wordnet (2011) web site, the Dow Jones Industrial Average is “An indicator based on the share values...