Effect of the Majority Party in Congress on the New York Stock Exchange Composite Index 2001-2006

MATTHEW R. ELLERSICK

College of Business

Western Carolina University

Abstract 

The New York Stock Exchange Composite Index is a market value of common stocks listed on the New York Stock Exchange. The base date of this measure is the last day of 1965. This composite index represents the movement of the markets in America. With this in mind, it is fair to say that this number is important to check how our economy is doing. The party in control of Congress can predict this index. It is unclear how this happens but there is data to show a correlation between the two based on the differences in performance while each party is in power in Congress. (JEL:G10,G14,G18)

Part 1. Introduction

This paper forecasts the New York Stock Exchange Composite Index for 2001 thru the end of 2006. The basis of this prediction is the parties in control during this period. There is a correlation between this market index and the party in control in congress. This is because of a partys agenda, while in power, reaches to all areas of life.A forecast like this may not be not be accurate to a high degree in the long run because of all other factors that are involved with the markets in the U.S. and world wide. However, this forecast will give a general idea of the amount of increase in the composite index in the medium to distant future, 2 to 6+ years. This forecast will be useful for investors to plan medium to long term investing based on the political make up of Congress.

The rest of this paper is organized as follows: part 2 presents the method of gathering and the data used to forecast the composite index for the NYSE; part 3 explains how a forecast can be created; part 4 presents the forecast of the composite index for the NYSE, based on the different situations of parties in control of Congress; part 5 presents what this means for the economy; part 6 discusses conclusions based on this forecast.

Part 2. Data

The data used in this forecast is found in two sources. These two sources are the 2001 World Almanac and the New York Stock Exchange web site, www.NYSE.com . Information on the party in control of Congress was gathered from the almanac. The starting year for data used in this forecast was set at 1953, do to the restriction of the data on the NYSE. The New York Stock Exchange web site supplied the closing composite index for each trading day since 1953. The data and the forecast also rely on the fact that, in the long run, the composite index will increase. All this data led to the production of an average index for each year and percent change to the next year. 

The data used was the beginning and ending composite index for each year from 1953-2000. The composite index was gathered from the New York Stock Exchange web site. Next, a percent change from the pervious year was calculated by taking the averages of the two years and figuring an absolute value between the two. This value was then divided by the year in question. The data also used, displayed the party in control of both the Senate and the House, and how long the respective parties were in power. The last piece of data was an average percent increase per year, based on the amount of time a party was in power.

The data discovered showed a slow growth in the composite index in the late 1960s. 1969 had only1/10th of a percent growth. The 1970s showed a roller coaster of the percent change of the composite. This is shown with a 30 percent growth in 1974 compared to 16 percent growth two years later in 1976. The 1980s was a less severe fluctuation than the 1970s. The year 1989 was a turning point on the data sheet. That year was the beginning of a positive growth in the composite that has yet to become negative. The year 1995 thru today marked a greater growth then has been seen in the past three decades. The percent change from year to year was then compared to the party in control during the time. It was discovered that when Republicans were in control of the Senate, the composite rose at the rate of 12 percent per year. The composite index has risen 14 percent per year during the 6 years the Republicans have been in control of the House. On the other hand, when the Democrats controlled the Senate from 1967, there was a growth of 4 ½ percent per year. The composite index grew 6 percent per year with Democrats in control of the House. These averages showed a need to investigate party control and the NYSE Composite Index.

Part 3. Why this Forecast Works

This forecast assumes that Congress will not be influenced greatly by a third party. The forecast also assumes that, in the long run, all major markets will grow. Finally, it is assumed that there will be no major depression within the forecast period. This forecast will take the percent growth in the NYSE Composite Index and compare it to the party in control of congress using linear regressions. A number of regressions are needed to determine the variable from party control that will influence the NYSE Composite Index the most. The equation first used for my linear regressions was:

Y= a + bX

The variable Y was the percent change in the NYSE Composite Index from one year to the next. The variable a is the percent growth with the Democrats being in power. While the variable b is the percent growth with Republicans being in power. The variable X is a dummy variable demonstrating who is in power with each given yearly percent changes. A value of 1 is assigned to X when there is a Republican control. A value of 0 is assigned to X when the Democrats have control. This regression was ran twice, once for the House of Representatives and once for the United States Senate. At this point it was needed to explore a final avenue into factors that effect the NYSE Composite Index. With this in mind, a third regression was done with the equation:

Y= a + bX + cZ

The variable Y remains the same as the pervious equation. The variable a is the percent growth with the Republicans not being in power in either part of Congress. The variable b is the percent growth with the Republicans in control of the House of Representatives. The variable c is the percent growth with the Republicans in control of the United States Senate. The variables X and Z are dummy variables with once again, a Republican controlled House (X) and Senate (Z) assigned a value of 1 and a Democrat controlled House (X) and Senate (Z) assigned a value of 0.

The forecast with then be made by taking the most significant resulting of the three regressions ran and calculate the total percent growth of the Index during the course of the next 6 years. Taking the regression coefficients, estimated NYSE Composite Index growth per year, and applying them to the conditions for the next 6 years does this.

Part 4. Linear regressions of the New York Stock Exchange Composite Index and party control.

The first of the regressions (1) I ran was the effects of the party control of the United States Senate on the New York Composite Index with percent yearly changes from 1954-2000. The regression estimate was (t statistics in parentheses):

Y = 4.5235(1.829) + 8.3995(1.786) x X

The R-squared of the regression was 0.0663. The F-statistic for this regression is 3.1915 and the significance of F is 0.0807. This means that the party in control of the United States Senate can not be used to predict the growth of the NYSE Composite index because the level is greater then a standard 5 percent margin of error allowed.

The next regression (2) I ran was the effects of the party control of the United States House of Representatives on the NYSE Composite Index with the percent yearly changes from 1954-2000.

Y= 5.145(2.270) + 11.4264(1.946) x X

The R-squared of the regression was 0.0776. The F-statistic for this regression is 3.7877 and the significance of F is 0.0579. This means that the party in control of the United States House of Representatives can be used to predict the growth of the NYSE Composite index because the level is very close to standard 5 percent margin of error allowed. This is the regression that was used in creating a forecast. However, first another set of variables needed to be explored.

The final regression (3) I ran was the effects of the party control of the United States Senate and House of Representatives, together using the data of the NYSE Composite Index with the percent yearly changes from 1954-2000.

Y= 4.5235(1.829) + 7.9048(0.985) x X + 4.1431(0.649) x Z

The R-squared of the regression was 0.0863. The F-statistic for this regression is 2.0799 and the significance of F is 0.1370. This means that the party in control of the United States Senate and House of Representatives cannot be used to predict the growth of the NYSE Composite index because the level is greater then a standard 5 percent margin of error allowed.

The most accurate forecast of the NYSE Compose Index out of the three regressions ran, would be created using the party control of the House of Representatives, regression number 2. There is about a 5.8 percent error rate in a forecast using this regression. This regression shows a 5.145 percent yearly growth when Democrats are in control of the House of Representatives and a 16.571 percent yearly growth when Republicans are in control. During the course the next 6 years however party control can change. Therefore there is not one forecast but three possible forecasts out of four possible scenarios that may take place before January of 2007.

Table 1

NYSE Composite Index Forecast Percent Return 2001-2006 

Various Scenarios

Year

Scenario1
Scenario2
Scenario3
Scenario4
Forecast1
Forecast2
Forecast3
Forecast4
2001
1
1
1
1
16.57
16.57
16.57
16.57
2002
1
1
1
1
16.57
16.57
16.57
16.57
2003
1
1
0
0
16.57
16.57
5.145
5.145
2004
1
1
0
0
16.57
16.57
5.145
5.145
2005
1
0
1
0
16.57
5.145
16.57
5.145
2006
1
0
1
0
16.57
5.145
16.57
5.145
Forecast percent growth from 1/1/2001-1/1/2007
99.4%
76.6%
76.6%
57.7%
All four scenarios involve the next two years being controlled by Republicans and show a 1 in the rows of 2001 and 2002, therefore an annual growth rate of 16.57143 percent is expected those two years. The years 2003-2006 can place either party or both parties in control of the House of Representatives. The forecast is to predict the NYSE Composite index at January 1st 2007 therefore scenarios 2 and 3 with produce the same forecasted amount. This leaves three forecasts of the growth of the New York Stock Exchange Composite Index based on the Party in control of the House of Representatives with a 5.8 percent chance that the effect on the Index it is do to chance.

Part 5. Vote Republican

This forecast predicts 3 possible scenarios ranging from a growth of 57.72 to 99.43 percent in the composite index during the course of the next 6 years. A higher rate of growth in the NYSE Composite Index is predicted with the Republican Party in control of the House of Representatives. This information is helpful to investors when determining where to place their money as elections are decided. According to this forecast a person would be wiser to place his money in a bond or CD during a Democratic control House of Representatives, while investing in the New York Stock Exchange or other markets during a Republican controlled House of Representatives.

Part 6 Policy Conclusions

The New York Stock Exchange Composite Index will be in between 1036.03 and 1309.98 on January 1st. A more exact forecast can be developed by using one of the 3 situations, but may be way off. As the election of 2002 and 2004 take place there will be a clearer picture of the Composite Index on that first day of 2007.

References

New York Stock Exchange (2/28/2001), http://www.nyse.com (2/28/2001).  

The World Almanac 2001, Mahwah, NJ, 118p