Presidential honeymoons, political cycles and the commodity market

Abstract

Newly elected administrations consider the Presidential honeymoon period as the best time to promote legislation about their policies and make their own mark on the future economy and society. We use historical data about the US presidential elections since the presidency term of Ronald Reagan (1980) to that of Joe Biden and examine how the commodity market reacts during this period. The emerging picture indicates that despite the corresponding increase in political uncertainty during this period, commodity prices are generally unaffected, but their variability is slightly lower. In addition, the forward-looking volatility indices related to commodities also show significant drops in their levels. These findings contradict theoretical models suggesting that market participants demand compensation for bearing heightened political risk. Finally, we find evidence that commodities are more volatile under Republican presidents than Democratic presidents.