Value stocks
The U.S. presidential election is just around the corner, and while finance experts may not be able to predict the winning party, we may be able to predict which stocks will win during the presidential honeymoon period.
After significant investigation, our research has shown that during the first 100-days following the inauguration of a new U.S. president, value stocks and stocks with a large amount of investment generate higher returns.
Investing in these types of stocks is called value investing. Value investing is a very popular strategy, this is where investors buy stocks that are priced lower than their intrinsic values.
Why this occurs
The achievements during the first 100-day period represent a yardstick of the success (or otherwise) of a new president. During this period the new administration is incentivized to implement a large number of changes in policy to quickly make a mark on the presidency.
The honeymoon period is the most opportune time for an administration to enact change. Incoming U.S. presidents have higher legislative success rates during their first 100 days in the inaugural years.
The concentrated and substantial policy change during this time induces high political uncertainty, which exerts a significant influence on the share market.
What our research revealed
In periods of high uncertainty, it is natural for large, established firms to delay investment. To the extent that investment is irreversible and/or costly, firms may not be able to fully adjust to heightened political uncertainty. Value firms tend to be mature and have a lot of fixed assets in place, thus being inflexible to adapt to uncertainty.
Whereas growth firms such as fintech companies tend to have a larger proportion of intangible assets, thus being able to swiftly downsize in uncertain economic periods. In presidential honeymoon periods, value stocks are riskier, and investors will command higher returns for investing in these stocks.
That means, if there is a new U.S. president, it will be a profitable trading strategy to buy value stocks and short sell growth stocks before the inauguration and hold this position till the end of the 100-day period. This value strategy generates 3.51% growth per month during the presidential honeymoon period, which is in stark contrast with only 0.27% per month at other times.
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Please speak with a financial advisor before making investment decisions”.
This is a joint research project with Associate Professor Kam Fong Chan from the University of Western Australia, Professor Philip Gray from Monash University, and Professor Stephen Gray from the University of Queensland.
Angel Zhong - School of Economics, Finance and Marketing
