How are Financial Markets affected by the Election of Donald Trump? An Event Study on the U.S Stock Market’s Response to Changes in Political Leadership

Abstract

Changes in political leadership influence the economic policy of government, which directly impacts on firms. Accordingly, the risk-adjusted market return alters, as investors reallocate their investments. We apply common financial methodologies in investigating how the election of Donald Trump affects the U.S stock market. Utilizing the Fama and French three-factor model, and the Jensen’s alpha approach, we find no evidence of abnormal returns from Trump’s presidency. However, we find that a portfolio consisting of the health care sector, the defense sector, and the flight-travel sector generates negative abnormal returns during the Bush – and Obama presidential periods. Correspondingly, we reject that the election of Donald Trump negatively affects the combined portfolio, as the portfolio performs much worse with Bush and Obama as presidents. Furthermore, we find evidence that the health care sector, the defense sector, and the flight-travel sector possess a sufficiently higher risk-adjusted performance with Trump as president, compared to Bush and Obama based on Sharpe ratio estimation. Controlling for political party, the results do not support that Trump’s effect on the U.S. stock market is related to his republican policies. We conclude that the election of Donald Trump increases the performance for the sector portfolios compared to the Bush – and Obama presidential periods.