Presidential Elections - How They Affect the Stock Market

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.

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.