The United States is the world’s largest economy and as such, its elections generate attention worldwide. To financial markets, its elections are quite significant. There is a period of time when finance and politics come together and this is when the American people go to vote in their president. During this period of time, investors are normally up and about trying to know how the elections will affect the stock markets. History has shown us that the cycles of presidential elections normally have an effect on the returns on stock markets.
If the past 182 years are anything to go by, the stock market has been noted to be affected by the presidential cycles at least for the most part of those years. During the first two terms of office of a president, recessions and market wars have been noted to start. Prosperous times and bull markets normally mark the other half of the president’s term.
Since the year 1833, an average gain of 10.4% has been marked on the Dow Jones before the election of the president. In the election year, an average gain of nearly 6% has been marked. I contrast; looking at the second and first years of the president’s term, there has been average gains of about 4.2% and 2.5% respectively. These returns are normally price based. They don’t include dividends. One notable exception to this in recent times was in the year 2008 when returns on the Dow went down nearly 34%.
Going by tangible examples, we can note that the current presidential cycles are anything but average. During Obama’s first year as president, the Dow went up 27% which was quite impressive and unforeseen. In the second year of his term, the Dow was up 7.5%. His third year which going by previous times is meant to be the strongest cycle saw a drop of 2% in the Dow industrials. Looking at this cycle, it can be noted that they are so out of sync with the normal cycle. This has been noted by Jim Stack who is a publisher and market historian on InvesTech Research.
This year has seen a primary season in the political field that has been hotly contested. Below is a review of how the stock markets have responded to the process of elections. Going back to the 1960’s, one can note two of the patterns that stand out which in turn can influence trading this year.
- During years of presidential elections when the incumbent is not running for office, the Dow Jones has seen a decline of about 0.05% every month, this been an under performance since it normally averages a performance of 0.78% on returns monthly when the incumbent president is running for office. This is normally because of the uncertainty over; who the president will be after the elections and what policies will this individual introduce and how they will affect the market.
- Election years that have seen the ruling party defeated in the elections has had a monthly return averaging 0.13% which is an underperformance considering that in years which have seen the ruling party re-elected normally have monthly returns averaging 0.85%. This is a suggestion that soft markets normally reflect their discontent over the direction that the country is headed and this want of change may show during the election.
Going over Market performance during this year as compared with other recent election years we can note the following:
- 2016 started off on a rocky place in the month of January which could be termed as having been a bit worse than non-incumbent years that were similar such as the year 2000 and 2008. Unlike other years that have seen a crumble over stocks entering bear markets that could be termed as major, 2016 stocks went back up again during the end of February and March.
- Currently there are a number of financial derivatives dealers who offer online trading to investors across world markets. One such dealer is CMC Markets, such companies and the thousands of investors who depend on them always look keenly at presidential elections since they are aware of the effects that the elections have.