April 2020 Issue of HR Professionals Magazine

Page 8

How Do Elections Influence the Economy?

As

election campaigns begin to gain prominence in the media, one may often contemplate the effect they may have on the economy. Gary Stringer, Kim Escue, and Chad Keller of Stringer Asset Management published a wonderful article in ETF Strategist Channel on this topic. Their article suggest that elections do not have major economic impacts based on their analysis of GDP, population growth, labor force growth, and labor productivity. This caused me to wonder about the unemployment rate and jobs that were added/subtracted from the economy, in addition to what economic research may suggest. This article will review economic literature on market influences from my doctoral dissertation, and extend the work of Stringer, Escue, and Keller by examining the unemployment rate and total nonfarm payroll employment. Please note that the contents of this article is based on the opinions of the author and may not reflect the opinions of the Bureau of Labor Statistics.

Review of Economic Literature

This section highlights research from my doctoral dissertation. To obtain the original sources, please consult the dissertation available freely on ProQuest. Elections, terrorist activities, wars, and political scandals have considerable influence on financial markets. Exchange rates react faster to geopolitical events than any other form of financial investment. Research shows that election outcomes have the potential to threaten asset prices and the economy as a whole. A political resignation could potentially cause abnormal returns in the field and affect currency markets. A geopolitical event will have a negative impact on the economy when the event undermines the confidence of investors During political instability, investors seek safety by divesting their investments, which depreciates the domestic exchange rate. The democratic processes contribute to the risk premiums that affect interest rates as political events raise doubts and concern about the government. Presidential candidates often float policies that could strengthen or weaken the economy (depending on your view), therefore causing investors to anticipate uncertainties in which premium will be required for a forward position, thus affecting spot and forward markets. The risk of war also has strong impacts on fluctuations of financial variables. In economic literature, violence has shown to affect asset market reactions and it was found that conflict has significant impacts on prices of currency, oil, stock, commodities, and gold. This shows that markets are sensitive to news about future prospects. The Iraq war increased oil prices while decreasing the value of the US dollar, Treasury yields, and equity prices. Terrorist activities also have a negative on financial markets as foreign investors divest their investments. 8

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By RICHARD WORKS

Trade restrictions make the domestic economy better off by modifying the terms of trade in favor to improve current account balance that appreciate the domestic currency. However, the volume of exports has a positive effect in the GDP. Therefore, regulations limiting exports would negatively affect growth of the economy. Natural disasters and global virus outbreaks provide significant effects on financial markets and economies. Significant adverse impacts from disasters and global virus outbreaks slow down production, which disrupts import and export activities, which will yield a decrease in an economy if the economy is dependent upon exports. Less demand for a domestic currency will occur if the domestic economy is unable to meet foreign demand because of a natural disaster or similar major event.

Unemployment Rate and Jobs Added

Now that we have clearly seen that economic research supports the notion that elections can affect the economy, we will look into two measure of the economy to examine real world examples. Through this analysis, we will see if our findings corroborates economic literature, or if our findings differ, thus adding additional information to the boding of knowledge on this subject. The variables that we will examine are the unemployment rate and the total nonfarm payroll employment (jobs added). See table 1.


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April 2020 Issue of HR Professionals Magazine by Cynthia Thompson - Issuu