Presidential Election Cycles and the Turn‐of‐the‐Month Effect

Objective. In this research, the presidential election cycle hypothesis is evaluated within the context of the turn‐of‐the‐month effect found in stock returns. Methods. Returns from the daily Standard & Poor's 500 (S&P 500) index, the Dow Jones Industrial Average (DJIA) index, and the NASDAQ Composite index are grouped into turn‐of‐the month returns and non‐turn‐of‐the‐month returns. Statistical comparisons are conducted to evaluate the returns based on administration subperiod, temporal subperiod, and party affiliation. Results. The results provide evidence of higher turn‐of‐the‐month returns in the second half of presidential terms. The higher turn‐of‐the‐month returns account for most of the additional returns found in the second half of presidential terms evidenced in prior research. Conclusions. The persistent higher investment returns for stocks found in the second half of presidential terms can be linked to fiscal and administrative policies that increase household liquidity prior to elections. Incumbents attempt to influence voter choice and energize core constituencies by increasing household liquidity prior to elections through fiscal and administrative policies. These actions create higher turn‐of the‐month returns in the second half of presidential terms, which generate additional overall investment returns for the period.