You may be wondering what the relationship between the stock market and elections is. In the wake of Wednesday’s stock market rally, in which both the Standard & Poor’s 500-stock index and the Dow Jones industrial average rose sharply a day after the midterm elections, pundits suggested that the answer was “quite a bit.”
Such things are easy to speculate about — but harder to prove. The main problem is that the buying and selling of stocks at any given moment is a result of many different factors, and you need to somehow isolate an election’s impact on such trading.
How to do this? One strategy is to focus on how the stock market reacts in the wake of an electoral surprise. When the market is abruptly presented with information at odds with what it has been expecting, you can reasonably assume that any sudden shifts in activity are largely driven by that news.
Consider the defeat of the House majority leader, Eric Cantor of Virginia, in a primary election in June. Mr. Cantor’s loss came as a shock to political observers and led to predictions of dire consequences for corporations with ties to him — and perhaps for business more generally. Headlines referred to a “Cantor effect” that was “especially bad news for big business.” Analysts tied Boeing’s stock decline and the Dow Jones’s general decline the next day to Mr. Cantor’s loss.
But did Mr. Cantor’s defeat really matter for firms? Analysts suggests that it didn’t. Studying how firms’ stock prices fared in the wake of that election and found that investors largely greeted Mr. Cantor’s defeat with a collective yawn. The results indicated that over various time ranges around the election, publicly traded companies in the United States whose employees or political action committees had donated to Mr. Cantor’s campaign committee and leadership PAC performed no worse than those that had not, even after accounting for how much they contributed. (In the very few cases where there is a statistical effect, the economic effect is negligible.)