Elections have historically been strong indicators for market movements, but history reveals some interesting correlations between the presidential election cycles and the financial markets, which may even place the markets as indicators of election results.
So as this election inches closer, here are a few things for traders to consider and keep in mind.
The Party Doesn’t Play
Republicans have traditionally been viewed as the more fiscally responsible party. So it would stand to reason that the markets would perform better under Republicans. But in fact, that’s not the case at all.
Historically, the Dow Jones has performed better with a Democratic President, with a 9% annual rise in stocks when Democrats are in control. And since 1947, the S&P 500 has posted a total annual return of 10.8% under Democratic presidents, versus 5.6% under Republican presidents.
One analyst explained as follows. ‘While Republicans use tax cuts and deregulation, Democrats use redistribution policies like increased unemployment benefits and food stamps to stimulate the economy.” And though it may sound counter-intuitive to some, policies like the ones the Democrats traditionally endorse, have a track record of actually stimulating the economy.
The S&P Can Make Pretty Good Predictions
Research shows a pattern in the S&P 500 that has predicted 87% of elections since 1928, and 100% since 1984. If the S&P 500 is trending higher the three months leading up to the elections, then the incumbent party usually wins. If it’s trending lower, the incumbent loses.
The three-month clock started ticking on this year’s election on August 3rd. Ever since the S&P 500 has been going up. This represents a potential benefit to President Trump’s re-election chances.
Biden Could Win
Still, analysts and pollsters favour a Biden win. And if the democratic hopeful does win in November, what will it mean for the markets?
Most analysts predict that Biden’s call to lift the corporate tax rate from 21% to 28% could have a negative impact.
But his policies for managing the health crisis and proposed investments in clean energy could offset the negative outlook. After all, long-term climate change will have a significant effect on the markets, overshadowing that of COVID-19. So analysts remain positive on the ‘green transition’ even as Oil and Gas continue to be necessary as a bridge towards a future with cleaner energy.
The Countdown Commences…
While there are some patterns between US presidential elections and market performance, past performance is never a guarantee of future results. And as we edge closer to the elections every day, there are still plenty of scenarios that the markets would never be able to predict.
One of those risk-factors is the possibility that the election result is contested. The market could take a sharp drop as it did in the contested election of Bush and Gore.
So it’s a good idea to stay up to date on the election news and analysis leading up to the elections. Axiory will be providing market analysis and in-depth insights through frequent webinars, articles and videos, to keep you up to date and ahead of the curve, so that no matter who wins come November, you can still achieve your trading goals.
Peter Bukov | Market Analyst
Peter comes from a background in corporate finance which began in 2013 when he completed the Corporate Finance Program at the University of Economics in Bratislava. He’s been actively involved in the market sector since 2008 and got his hands-on experience in trading in 2011.
His experience in finance and trading continues not only as a market analyst at Axiory Intelligence but also through his studies to obtain a degree in Capital Markets. The study is in line with MIFID II regulations and is under the supervision of the European Regulator ESMA, which strongly emphasizes ethics and morale in investing and working with a client.
In addition, Peter was awarded the title of ASCI from the CISI Educational Institute of England where he is an associate member and the Bloomberg Aptitude Test results ranked him among the top 4% worldwide two years in a row.
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