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US stock returns are higher under Democratic presidents

LiveMint logoLiveMint 24-02-2017 Ragini Bhuyan

Can one draw any lesson about stock market returns from electoral outcomes? A recent National Bureau of Economic Research working paper by Lubos Pastor and Pietro Veronesi from Chicago Booth School of Business shows that stock market returns in the US are much higher when a Democrat is in the White House. The paper finds that “all of the equity premium over the past 89 years has been earned under a Democratic president”. Between 1927 and 2015, the average excess market return under Democratic presidents has been 10.7% per year, whereas under Republican presidents it has amounted to only -0.2% per year. The authors attribute this to the fact that election of a Democratic president is a reflection of risk-averse behaviour among the voters, which leads to higher returns in equity markets as well. In contrast, Republican victories are associated with less risk-averse behaviour, hence the lower returns. The authors also suggest that Republican-Democratic return differential is the highest in early years of Presidencies, as preferences tend to change overtime.

Also Read | Political Cycles and Stock Returns

The Trump administration’s proposal to change the way trade deficits are calculated in the US has angered economists. The proposal seeks to exclude all goods imported into the US and exported without any changes from being taken into account in exports. This will effectively increase trade deficit numbers as it would count incoming goods as imports but not count them as exports when they leave the country.

Writing in the CafeHayek blog, Don Boudreaux, professor of economics at George Mason University, has termed the proposal as an accounting fraud, one that would only serve Trump’s agenda by whipping up public hysteria over trade deficits.

According to Boudreaux, such goods should either not be counted at all in import-export calculations, or it should be included in both. He showed the fallacy of Trump’s proposal by pointing out that the reverse, which would involve counting such goods as exports but not as imports, would shrink the trade deficit.

Also Read | What Accounts for Trump’s Trade Tales?

Speaking at the Indian Banks’ Association Banking Technology Conference, Reserve Bank of India’s deputy governor Viral Acharya blamed banks for failing to recognize stressed assets in a timely manner, stating that this had led to a lack of resolution of such assets. He argued that banks should be incentivized to restructure stressed assets, focus should be on the efficiency and viability of the restructured assets, and the government should not foot all resulting losses.

Acharya also set out two different models for this process. The Private Asset Management Company model would be suitable for sectors such as metals, engineering, procurement and construction, telecom, and textiles, where assets are more likely to have economic value in the short run. The National Asset Management Company model would work for sectors where there is both excess capacity and where assets are economically unviable in the short- to medium-term.

Also Read | Some Ways to Decisively Resolve Bank Stressed Assets

Islamic Banking (IB), which is based on codes of Islamic Law Shari’ah and prohibits earning interest, dealing in products with high uncertainty, short-sales etc., is slowly growing its footprint in the world.

According to a recent IMF paper, IBs currently operate in more than 60 countries. While the paper notes that IBs have done well on measures such as capital adequacy norms and have the potential of bringing erstwhile unbanked population in the ambit of formal financial sector, it underlines the need for further discussion on the need to improve the understanding and regulatory framework of conventional banking system with regard to the IB system.

Also Read | Ensuring financial stability in countries with Islamic Banking

Writing in Vanity Fair, Nobel Laureate Joseph Stiglitz has warned that there will be no winners if Trump unleashes a trade war with China. He points out that Trump’s political pronouncements are out of touch with today’s multi-polar world. Raising tariffs or threatening China will not restore the US to its pre-eminent global position post-World War II. Stiglitz argues that Trump is labouring under the false assumption that US protectionism will hurt China as the US is a big export market. He points out that China has been reorienting its economy from export dependence to domestic consumption. Being a state-led economy, its government is also in a strong position to swiftly react to any moves by the US.

Moreover, those Americans who have lost out to globalisation are the ones who will be hurt the most by a trade war. A trade war will not create new jobs and disrupting global supply chains in the name of producing jobs for Americans will only raise prices of goods for the average American. A retreat from globalisation may cut US imports but it will also reduce US exports.

Also Read | Trump’s most chilling economic lie

Economics Digest runs weekly, and features interesting reads from the world of economics.

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