Impact of US Election on Stock Market

GlobalStock Market performance from here to the end of the year will be heavily influenced by the US elections in November.

Stock markets hate uncertainty, which is why the historical tendency has been made that an incumbent party win is the most positive for stock markets in an election year.

Most of the expert says, in terms of stock markets, it is hard to say anything concrete about the likely impact of the election. Historically, S&P 500 volatility has typically been higher in election years than in non-election years, as markets frequently reprice the probability of the future administration’s policies. Markets have also tended to react more positively in the immediate aftermath of the election of a Republican president, as the party’s policies are broadly thought of as more market friendly. But it is important to note that this is by no means a strong rule of thumb, and that other significant geopolitical and economic events may carry more influence over the market’s direction.

Selling equities in the expectation of a Trump loss can be an expensive short-term mistake if he wins instead.

While this election year's economic backdrop does not favour a Trump win, the two indicators above can give investors a stronger sense of the more likely outcome as the election date gets closer.

Stock market performance from end-August to the elections

One of the most interesting indicators is the US equity market's performance from the end of the US national conventions (Aug 27) up until election day. This indicator has had a remarkable correlation in calling whether the incumbent political party won the re-election, and correctly predicted Hillary Clinton's loss four years ago.

If positive (historically on average +6 per cent in this period) the incumbent has won a majority of the time. If negative (-1.4 per cent on average) the incumbent has lost most of the time.

As a silver lining for longer term investors, the negative stock performance in an election year when incumbent Republicans have lost have historically been followed by the strongest gains on record in the post-election years.

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