Historically, presidential elections have heavily impacted the stock markets causing both bullish and bearish reactions. As a direct result of these "reactions", recognizable patterns have formed that can be used for investment-managing purposes. Given the uniqueness of this particular election cycle, it is possible a new pattern will begin to emerge. Whoever prevails will certainly play a large role in where the markets go from here. We’re going to look at what can happen when they take the oval office and examine past election statistics.
Gains and Losses Since 1928
Let’s look at the 22 presidential elections held since 1928. In 14 elections, the stock market showed gains three months prior. 12 of these 14, the incumbent won and therefore remained in the White House.
Likewise, when the stock market showed losses three months prior, 7 of the remaining 8 elections saw the incumbent lose with only some exceptions.
Unfortunately, we cannot gain much insight from looking at the stock market in the preceding months of the upcoming election because there’s no incumbent.
Changes Within the Presidential Cycle
We can spot trends within the presidential cycle as a whole. It’s helpful to look at what happens during the years of a presidential term to better understand how the markets are likely to react.
The First Two Years
During the first two years’ wars, bear markets, and recessions are common. Regardless of who gets elected this time, the chances are we will see a drop in the financial markets. However, the candidate who does get elected will influence how small or large the drop is likely to be.
The Second Two Years
Most four-year cycles tend to see bull markets and prosperity during the second two years. The best year by far is the year before an election, as the Dow Jones rose by an average of 10.4% in a single year. And this trend goes all the way back to 1833.
The one recent exception is the year Obama was elected in 2008. The Dow Jones sank by a whopping 34% that year.
Democrats and Republicans
The myth is that a Republican victory will see stocks rise in the aftermath. The premise is that republicans are friendlier to businesses. But this couldn’t be further from the truth. There’s no evidence to back this up. Both parties have roughly equal effects on the stock market, dating back to 1900.
So What about this Unconventional Election Cycle?
This is one of the most chaotic election cycles in history. Neither candidate is particularly well-liked as a whole, and one has made it there against all odds. So what effect is this likely to have on the stock markets?
A divided country means that the usual trend of the markets dropping in the first couple of years after the election is almost certain to happen. Most analysts agree that if Trump gets elected the markets will plunge due to the uncertainty surrounding his policies and presidency.
However, don’t completely rule out the markets defying previous trends. After all, this is a presidential election cycle that has thus far, defied history.