How Do US Elections Affect the Stock Market?

US elections influence the stock market through policy expectations, increased volatility, historical performance patterns, immediate post-election reactions, and long-term implications based on the new administration's economic policies.

Overview of the relationship between US elections and stock market

Since 1961, the S&P 500 has typically experienced positive returns during presidential terms, with Richard Nixon and George W. Bush being the only notable exceptions in over 60 years.

Many analysts have observed a potential 4-year Presidential Cycle, where stock market returns tend to be lower in the first half of a President’s term, followed by stronger performance in the third and fourth years. This theory suggests that newly-elected Presidents initially prioritize non-economic issues, such as social welfare, before shifting focus to economic growth to improve their chances of re-election or to support their party's candidates.

The President isn’t the only relevant politician in the country – looking at which party controls Congress can also be informative for traders. Perhaps not surprisingly, under both Democratic and Republican Presidents, the best annualized returns for the S&P 500 have been realized under a divided Congress, where one party controls the House or Senate and the other party holds a majority in the second chamber.

Stock market past performance during election years

Historically, the S&P 500 has experienced lower average returns when Democrats held majorities in both the House and Senate, although the market generally remains positive regardless of government composition. While it's useful to be aware of these historical trends, immediate factors like policy changes, geopolitical events, and valuation considerations often have a more significant impact on stock market performance.

Here's a summary of stock market performance during the election years of 2020, 2016, and 2008:

Election year 2020
Market Performance: The S&P 500 experienced significant volatility due to the COVID-19 pandemic and economic uncertainty.

Election Outcome: Joe Biden's victory led to an initial market rally, especially in sectors like technology and renewable energy.

Year-End Returns: Despite a turbulent year, the market finished strong, with the S&P 500 gaining about 16%.

Election year 2016
Market Performance: Leading up to the election, the market showed fluctuations as investors reacted to the uncertainty surrounding Donald Trump's candidacy.

Election Outcome: After Trump's victory, the market rallied sharply, particularly in sectors like financials and industrials.

Year-End Returns: The S&P 500 ended the year up approximately 12%.

Election year 2008
Market Performance: This year was marked by the financial crisis, leading to significant market declines prior to the election.

Election Outcome: Barack Obama's election was initially met with skepticism, but his policies aimed at economic recovery helped stabilize the market.

Year-End Returns: The S&P 500 ended the year down about 38%, reflecting the broader financial turmoil rather than typical election-year trends.

Conclusion:

US elections significantly impact the stock market, driven by factors such as policy expectations, market volatility, and historical trends. Investors often react to the uncertainty and potential changes in governance, leading to fluctuations in stock prices, particularly in the lead-up to elections.

While historical patterns suggest differing market performances under various administrations, immediate factors like economic conditions and geopolitical events typically play a more dominant role. Ultimately, understanding these dynamics can help investors navigate the market during election years, allowing for more informed decisions in a landscape shaped by political outcomes and economic policies.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.