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What Can We Learn From Financial Market Responses to the 2016 Election?

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Marriott Philadelphia Downtown, Grand Ballroom Salon C
Hosted By: American Economic Association
  • Chair: Justin Wolfers, University of Michigan

What Did Financial Markets Think of the 2016 Election

Justin Wolfers
,
University of Michigan
Eric Zitzewitz
,
Dartmouth College

Abstract

We perform a series of event studies documenting the sizeable financial market responses to several “natural experiments” that shook the 2016 election: Hillary Clinton’s win in the first Presidential debate, the release of the “Access Hollywood” tapes, and two controversial letters released by FBI Director Comey. Each of these reveals that equity markets strongly preferred a Clinton to a Trump Presidency. We then try to reconcile these movements with the subsequent response of financial markets, which initially cratered on news of a Trump win, then rose sharply. We then assess what this episode reveals about the external validity of event studies.

Unequal Rewards to Firms: Stock Market Responses to the Trump Election and the 2017 Corporate Tax Reform

Alexander Wagner
,
University of Zurich and Swiss Finance Institute
Richard J. Zeckhauser
,
Harvard University and NBER
Alexandre Ziegler
,
University of Zurich

Abstract

Massive dollars shuttled back and forth among firms on the twisted path to and passage of the 2017 tax reform. Prices of individual stocks responded to the difference between initial and revised expectations. From the bill’s initiation in the House to final passage, high-tax firms gained significantly, given the dramatic cut from 35% to 21% in the corporate tax rate. Internationally-oriented firms suffered notably, since investors assessed that the surprisingly high repatriation tax outweighed the benefits from territorial taxation. Daily price movements show that the aggregate market responded positively to lower expected taxes.

Economic Expectations, Voting, and Economic Decisions around Elections

Sam Corbett-Davies
,
Stanford University
Gur Huberman
,
Columbia University
Tobias Konitzer
,
Stanford University
David Rothschild
,
Microsoft Research

Abstract

We find that voters who associate themselves with the “winning team” in election, i.e., Leave voters in the 2016 UK Brexit vote and Trump voters in 2016 US presidential election, substantially increase their expectations for the stock market, but change their expectations of their household economic wellbeing only modestly. Respondents who associate themselves with the “losing team” are more varied in their responses, but the overall impact of the election outcome on this group is more muted. Second, changes in the stated expectations of respondents who associate themselves with the “winning team” are indicative of attitudinal shifts that do not manifest themselves in their actual behavior (they may be partisan cheerleading) as revealed by their online search behavior, in contrast to the members of the “losing team”, whose decline in durable goods purchases correlate with their stated economic expectations. Combining novel survey data and search, this study provides a uniquely meaningful comparison of stated attitudes with actual behaviors.
JEL Classifications
  • G1 - General Financial Markets