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)
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 party’s 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.
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 19532000. 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 1960’s. 1969 had
only1/10^{th} of a percent
growth. The 1970’s 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 1980’s was a less severe
fluctuation than the 1970’s. 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.
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.
Y = 4.5235(1.829) + 8.3995(1.786) x X
The Rsquared of the regression was 0.0663. The Fstatistic 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 a 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 19542000.
The Rsquared of the regression was 0.0776. The Fstatistic 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 a 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 19542000.
Y= 4.5235(1.829) + 7.9048(0.985)
x X + 4.1431(0.649) x Z
The Rsquared of the regression was 0.0863. The Fstatistic 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 a 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.
NYSE Composite Index Forecast
Percent Return 20012006 Various Scenarios 

Year









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 1/1/20011/1/2007

99.4%

76.6%

76.6%

57.7%

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.
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