Business Schools

Is a Presidential Rally Coming Up?


B-school gurus say a President's term has links to Fed actions and stocks. Plus, the Old Boy network in mutual funds, and health-care beefs

Stock indexes may be down 3% to 8% this year, but if history is any guide, there's a heck of a rally around the corner. In a recent paper in The Journal of Portfolio Management, Scott Beyer of the CFA Institute and business school professors Gerald Jensen and Robert Johnson say stocks pay off the most when a President enters the second half of his term, based on analysis of Presidential terms from 1957 to 2004. The authors credit the pattern to the Federal Reserve, which they write tends to lower interest rates once a President passes the midway point. True to form, the Fed began dropping rates in 2007. So how come the Russell 2000 fell 1.6% last year and a further 6.5% through Apr. 30? Jensen, a finance professor at Northern Illinois University, blames the credit crunch.

Networking Mutual Fund Returns

It seems the Old Boy network gets you more than an invitation to LinkedIn or the country club. A study published by Andrea Frazzini, an assistant professor of finance at the University of Chicago Graduate School of Business, finds that mutual fund managers who invest in companies headed by fellow college alums get bigger returns. The study, co-written by Lauren Cohen at Yale School of Management and Christopher Malloy of Harvard Business School and submitted to The Journal of Political Economy, says investments in "connected firms" outdid nonconnected businesses by an average of 8.4% a year from 1980 to 2006.

Why? Frazzini has three hypotheses. One is that people exchange information more freely with people they know and have ties to. The second is that these connections yield subtle info as well: "You cancel a golf date with me, I infer things are not going well with the business, I sell stock," he says. The third theory is darker, suggesting some smudges under that white collar: "Insider trading was involved."

Criticizing Health Plans

Health insurance companies have plenty of critics. Now they have one more: Leemore Dafny, an assistant professor at Northwestern University's Kellogg School of Management. Insurers argue that because they compete against one another, they keep prices down, saving everyone money. Not necessarily, says Dafny in a March paper, Are Health Insurance Markets Competitive? Dafny looked at data from 1998 to 2005, provided to her by a benefits consulting firm, that tracked the behavior of 200 major companies to see whether they shopped around to find the cheapest insurers. Dafny found that when these big companies made more money, their insurance providers raised their premiums. But instead of dropping the carrier to get a better deal, Dafny writes, companies generally stuck with their health insurers and paid more. "Carriers can and do take advantage of a firm's increased profits and extract higher prices from them," she says.

Gilmour is a regular contributor to BW Chicago.

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