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How will the US elections affect the market?
08
Nov
How will the US elections affect the market?


Each time the Americans elect the president, which happens every four years, analysts and investors try to predict how the elections outcome is going to affect the stock market. Having analyzed the past, we will see that the market movements and election outcomes do correlate with each other. This correlation is, however, rather contradictory, as if the politics and economics started pretending to have nothing in common once their correlation patterns are revealed and unveiled. So what shall we believe?

The market supports Clinton in the short term

How the market admitted supporting Clinton

Recent weeks have clearly shown that the market follows Clinton’s rating rather baldly. In the summer, Trump seemed an interesting, but freaky and contradictory candidate. At that time, the US market was at its maximum, and the indices were breaking all records. Something went wrong in the fall, however. Take a look at the S&P 500 5-month chart:

S&P 500 since June. The slump at the end of June reflecting the reaction to Brexit rebounded very soon. The downward movement since September coincides with the fierce election campaign. The most noticeable decline took place at the end of October, but it was recompensed on November, 7th.

The market started going down when Clinton’s rating was damaged during the campaign by such events as her sudden faint and the announcement of possible accusations by the FBI. The most drastic fall started in October when the FBI admitted analyzing her mail from an unauthorized server. However, once the FBI announced that they were not going to press any criminal charges against Hillary Clinton on November, 6th, the market soared and evened not only the previous week’s fall, but also a half of the overall autumn slump.

It shows us that the investors fear Clinton’s loss. But why? The Republicans are traditionally regarded as the more business-friendly party, so it would be logical to support them. This attitude may be caused by Trump’s scandalous public image. Although Clinton represents leftist Democrats, she embodies stability and continuation of the current economic policy, the results of which are clear from S&P 500 index chart during Obama’s presidential terms.

S&P 500 index since 2008. Obama made the trend positive. 

In the pre-election 2008, the market sunk catastrophically, but soon after Obama’s re-election it started regaining positions. In 2013 the market got back to the pre-crisis levels and even started setting new records. Compared to 2008, the falls of 2015 and 2016 look harmless, and they both were quickly overcome. In the summer 2016, S&P 500 reached another historic maximum. Today it is back to the maximums of 2015.

The recovery after 2008 may have coincided with Obama’s term just by accident. In any case, any new president would set the primary goal — to overcome the crisis. There is another factor, however, that acts against the Republicans, and it is much more general.

Republicans’ darkest secret

One of the most fundamental myths about the US Republican party is that it is more business-friendly than the Democrats. The Americans who are not very deep into the history of the economics may say that, although Obama had his luck, the Democrats in general are leftists striving to destroy the market freedom. Many liberal voters who support homosexual marriages, abortions and weed legalization vote for the conservative Republicans who are at least ‘for the economic freedom.’ But are they?

Most political decisions made by the Republicans during different periods seem to support liberal atmosphere in the economics. One of the brightest examples of this liberalism is the so-called reaganomics. However, how did the republican policy affect the stock market in the long term?

Today any person can use the global network to investigate charts and tables with stock index data and match them with different presidential terms. If we analyze Dow Jones (which is less informative than S&P 500, but is available for a longer period of time) since 1900, we will see that it grew more rapidly and steadily during democratic terms. On average, the Democrats kept it at 9% p.a., while the Republicans reached only 6%. Russ Koestrich, Chief Investment Strategist for BlackRock, says that this difference is not too large and can even be caused by measurement accuracy issues. Well, it can be so, but the sheer numbers can still somewhat dishearten a pro-republican voter — especially if he or she  studies the recent decades in more detail:

While regular Americans may have different points of view, it is clear for the investors en masse what happened in the market during the terms of the adulterer and sax player Clinton, terrorism and child porn fighter Bush Jr. and communist weed lover Obama. Not all these characters turned out to be good for the economics.

Trump is no Bush, but is still worth being afraid of

The Republicans do understand their main problem. Adopting Trump as a candidate is an evident attempt to refresh their positions. Trump is anyone but Bush. He is not too conservative, and he is even neutral to the decriminalization of marihuana. He acts like a freedom of speech partisan and demonstrates that many things can be said directly, or even bluntly. He shows that he is more liberal than the ‘liberal’ Democrats when it comes to political correctness. At the same time, he is still defending the traditional ‘white’ values like limited migration, no discrimination and market freedom. He is an important market player, and he understands better than anyone else, how important the support of the business is. 

Nevertheless, the recent market fluctuations show us: the US market is afraid of Trump. This is shown not only by the charts, but is also directly pronounced by many large market players. For example, JPMorgan analysts say, ‘We believe that if Trump wins, markets are likely to fall further – one should not use the Brexit template where stocks bounced quickly.’ 

Of course, we are not talking about a real long-term crisis. We are only talking about the psychological reaction of investors to the victory of a candidate whose economic views are still unclear. Most likely, the markets will fall until we learn, who is Mr. Trump — so, at least until the inauguration. What happens next, depends not on the investor’s psychology, but on the actions of the would-be president.

Long-term effect of the elections

We have discussed what will happen soon after the elections. If Trump wins, the markets are likely to go down for several weeks or months, while Clinton’s victory will make them rise. Given favorable conditions in the world economy, it will let the market beat the recent records quite quickly. What will happen next, though?

Candidates’ personalities and parties

If we are take into account only personal traits of the candidates, Clinton is most likely to follow Obama’s track (maybe in a more centrist sense), while Trump still remains a dark-hourse candidate. If we also concern the parties they belong to, we must admit that the statistics supports the Democrats. It is quite tricky, however: the Democrats are more or less predictable, while the Republicans, frankly speaking, are not. Trump is too off the beaten track, and it is strange to expect typical Republican actions from him. Bush Jr. was very distinctive, too, and it may be his personality that affected the US standing during the 2000s, not his party ideology. Finally, the current situation is too non-standard to be judged by the historic data. Current presidential programs have so little in common with the programs of the 20th century that even the terms ‘democrat’ or ‘republican’ mean too little now. 

Coalition or single-party dictatorship?

Although the history does not say anything about the favorableness of any candidate, it does say a lot about the projected political structure in each case. Moreover, it contests a very wide-spread myth. We have mentioned that a typical US citizen thinks that the Republicans are more market-oriented, which in fact is quite contradictory. The same US citizen believes that the market conditions are more favorable when the country is ruled by a mixture of representatives from the both parties. The voters believe that they could suppress negative influences of each other and help the market ‘flourish freely.’ To check whether it is true, InvestTech Research has studied three different periods starting from 1928… and they got an opposite result.

When one party controlled both the White House and the Congress, S&P 500 index grew by 8.45% p.a. on average. When one party controlled the White House, while the Congress was controlled by another one, it grew only by 7.8%. When different parties controlled different chambers of the Congress, the index grew by 2.75%.

The recent years do not fit into this statistics, however. During the two-year periods after the elections of 2010 and 2012, when the Congress was split between two parties, S&P 500 grew by 9.5% and drastic 21%, respectively.

Presidential cycle

There is also a certain pattern of positive and negative events rotation within a presidential term. Wars, market collapses and recessions usually start during the first two years of the presidential term, while the market growth and overall flourishing usually fall onto the second half of the term. Since 1833, Dow Jones has grown on average by 10.4% during the year before the elections, and by 6% during the elections year. The first and the second presidential years have shown only 2.5% and 4.2% increases, respectively.

Well, this pattern is also not redeemed from exceptions. In 2008, when Obama was elected, Dow Jones slumped by 34% (if we take into consideration only prices, not dividends.) In 2009, the index grew by 27%, in 2010 — by 7.5%. In 2011, it declined by 2%.

Can we predict anything?

It is hard to outline any definite trend for the long-term period. On the one hand, historic data indicate amusing and rather clear patterns, but, on the other hand, it is hard to apply them to the current situation. Too many political factors have changed, and the economic situation after 2008 is too indigenous. It is not 2008 itself, but 2009-2013 that fell off the beaten path. James Stack, the president of InvesTech Research, doubts: ‘Given that the past three years are so out of sync with the normal cycle, we’re not certain what 2016 will bring’, he says.

Any predictions for the elections outcome?

We have found another pattern that is followed more stably than the ones we have discussed before. The results of the elections are not a good indicator of the future market development. The market trends, however, do forecast the outcome of the elections! It is surprising, but this indicator works almost flawlessly. If the market have been growing during the three months prior to the elections, it almost guarantees that the ruling party will remain in power. The opposite trend indicates the coming shift in power.

If we study 22 presidential elections since 1928, we will find out that the market (or, to be more precise, the S&P 500 index) grew prior to 14 of them. 12 of these elections were won by a representative of the ruling party. 7 out of 8 episodes when the market had been falling ended up in the change of power. So, all in all, this rule worked in 19 out of 22 cases (86.4%), failing only in 1956, 1968 and 1980.

What can be said about the current situation? On November, 3rd it seemed that, although the market cheers for Clinton, it still predicts her defeat. Today it is not like that anymore: the market suddenly got back to the positions of September. Taking into account that the elections day usually causes market growth, the prior fall may be totally offset. Or may be not. It is time to admit again: we are a part of an extraordinary era when the politics and economics fight against the attempts to be predicted. Do they succeed?

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