Presidential Elections & The Stock Market
"Let's get political! I wanna get political!"
Actually, nothing could be further from the truth. I hate politics. I hate the players AND the game. Which is ironic considering I hold a B.S. in Political Science (in case you were wondering I hold a B.S. in Finance as well - guess which one I prefer?). I've remained pretty tight-lipped about this election, and perhaps I will discuss the implications of each candidates economic policies another time, but do not think that this article is an endorsement for any party. I'm pretty sure some feathers will get ruffled though.
Being an economist in this scenario is pretty easy though because judging a candidate by their economic policies - and some historical stock market trends - is probably the easiest way to gauge their potential success. The market is resilient though, and ultimately does not care who is personally in power. The stock market is all about the confidence and business transactions of people, and it's a very rare situation for a political candidate to disrupt this to the point of collapse.
Whoever is elected, I do not think the stock market will react drastically in one direction or the other. Or if there is a reaction, it will be short-lived (Brexit anyone?).
One thing worth noting is that the stock market is incredibly volatile during election years, and despite what I said above, it really is all about being antsy to know the outcome rather than fundamentally believing that one person can cause a complete collapse. What usually happens is that a new cycle is created, as this chart from Forbes notes. The following data showed that from 1833 to 2013, the returns of the stock market generate the greatest average annual return in the year BEFORE a presidential election.
What can ultimately be derived from this (in my political scientist cap) is that markets generally thrive after mid-term elections, since generally this is when the President and Congress finally reach a balance of power in some capacity. For the first two years of a presidency, Congress and the President typically do not work well together. The voting public takes notes in these two years and shifts the party powers accordingly during the mid-term cycle. Confidence returns, and people begin spending, buying housing and getting jobs. Then when a new president is chosen the cycle repeats itself. Kind of a befuddling observation, but it's important to remember that the stock market moves in cycles (and there are MANY). But this is what happens on AVERAGE and it is important to note with the rest of the information below...
Political matters are a good cause for these cycles, but it's also worth noting how the market (namely bankers and brokers) interpret wins from different parties. Let's take a look at the performance of the S&P 500 and it's average returns during election years and afterwards over the past century. And in case you want to question these figures, it is painfully easy to pull up historical charts and figure it out.
Republican politics generally favor corporations/businesses; from a tax standpoint, they believe in lighter taxes and lower capital gains taxes, which is generally good for the entities (companies and people) with money - means more in their pocket. Every four years this is the story: we get hyped about tax cuts and the market rejoices. In election years that resulted in the Republicans winning, the S&P 500 brought in an average annual return of 11.4%, and brought the change of ending the year higher than the previous year to about 90% certainty. This is definitely better than the election year average return rate of about 7.0% and certainly better than a Democrat win at 3.3%
That's all fine and dandy, but hold your horses. While the sentiment of the market rejoices in the fact that a Republican has taken office, the celebration is not usually long-lived. It would be a safe assumption that Republicans would keep the rally going, but as history has shown that is not the case.
The average return of the S&P 500 in the years following an election falls to 5.13% (so a good 2% slowdown) and the chance for having positive returns for the year drops to 54.5%. Interestingly enough, in the years following a Democrat win in the White House, the S&P 500 averaged an annual return of 11.72% and 8 out of 11 times, the index ended positive. There is a stark contrast to Republican victories, which resulted in average annual returns of -2.78% -- only 3 times in the last century were the returns positive following a Republican victory, twice with Ronald Reagan and once in George W. Bush's 2nd term: +26.33% in 1985, +27.25% in 1989 and +3% in 2005.
So what is the takeaway here? Well if you make all your decisions based on averages, then you know what's good for the economy. However, the world has changed so drastically in the past 10 years, that it is hard to really know with a blazing amount of certainty what each respective party's victory will mean for the stock market. There are obviously other factors to consider - particularly where the economy is currently positioned and the state of the rest of the world.
My suggestion? There are always exceptions to the rule, but it is very important to listen to the economists - they are the only true "fair and balanced" people out there since they only draw conclusions from charts and charts, my friends, do not lie.