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The Nikkei 225 Reconstitution Case Solution

Solution Id Length Case Author Case Publisher
2284 1284 Words (7 Pages) Robin Greenwood Harvard Business School : 207109
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The report analyses the stock market performance under different political regimes (Democratic & Republicans). For this, purpose the New York Stock Exchange data under four presidents including Bill Clinton (Democratic), George W Bush (Republican), Barack Obama (Democratic) and Donald Trump (Republican). The daily closing value of NYSE under each president is close proximation of the stock market performance. Each political party has impact on stock prices since corporate investing behaviour changes because of uncreatability and volatility in political system. Exhibit 1 tracks the performance of NYSE Composite Dow Jones under the said four presidents. The volatility in stock market performance can be observed under the leadership of Democrats and Republicans.

Case Analysis for The Nikkei 225 Reconstitution Case Solution

Exhibit 2 shows the average stock market performance under various leadership scenarios. The graph shows that when democrats were in power, the average stock return was 9% as compared to 7.4% with republican holding the white house. However, republican holds an edge if political party in either side of congress is considered. With republican majority in Senate, stocks averaged 11.3% as compared to 6.3% senate with democrat’s majority. Moreover, if republican controlled the house, the average stock returns were 10.7% in contrast to 7% when democrats controlled the house. The risk adjusted measures are also calculated shown in Exhibit 3 to measure the risk differences. 

2. Exhibit 3 also calculated the average daily return under the recent four presidents. Average daily return was highest under Bill Clinton regime followed by Barack Obama, Donald Trump, and George W Bush respectively. This shows that the average daily return on stock market was better when democrats hold the white house as compared to republican president. The average daily return was negative under George W Bush. The risk measures also indicate towards republicans being riskier as the standards deviation under Bush was highest. It may suggest that the stock markets were more volatile, and the stock performance was uncertain during his policies. 

Since, the total control is rare since the congress and white house mostly remained split among republicans and democrats. With a democratic president, and majority of republicans in either side of congress indicate higher stock returns. With democratic president and majority in senate and house, the stock performance was below average. Even when the congress was split, the stock returns was above average. Moreover, during the end years of Bill Clinton there was a boom in stock performance which is attributable to the dot.com bubble as can be seen during 1999-2000. During early years of Obama, the stock market crashed on account of financial crisis in 2008. These factors must also be considered to evaluate the performance of stock market with respect to the political party in power. 

3. There are few industries which are substantially sensitive to political cycle and the return in those industry was subject to policies taken by the political regime. A democratic run DC could mean tougher regulations and strict tax policies on the big tech companies which may result in the tech giants losing values. Since, the tech companies already face scrutiny, democrat may bring them under further pressure (Choe, 2021). Although, the most partisan industries are subject to the amount of funding received by the democratic or republic candidate from that industry stakeholders. 

There are few industries which provide more funding to republicans and expected to thrive under republican leaderships. These industries may include poultry & eggs, mining, construction, oil & gas, steel production, livestock, automotive. These industries may perform well with a republican president. On the other hand, the industries which provide most funding to democrats include renewable energy, Entertainment (tv, movies, music), non-profits, law firms and education (Open Secrets, 2020). The return of these industries may be higher under democratic presidency since the government may owe to the providers of funding during the election campaign. It can be learned from the history that the republicans did not implement strict regulations in financial services sector.

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