How the Elections Can Affect the Markets

Every four years, the American people are tasked with a very important job: choosing who will be the next President of the United States. This year, that decision is shaping up to be one unlike any other, and the markets are already responding to it. The big question is how is this particular election — between former first lady Hillary Clinton and notorious businessman Donald Trump — affecting things? Also, how has the market historically performed pre-election and post-election? Let’s examine these issues.

How an Election Affects the Markets

Every election holds its own set of variables that affect the markets, regardless of who sets foot in the oval office. President Barack Obama began his term during the recession; meanwhile President George W. Bush inherited a robust economy. However, there do seem to be some historical correlations between the markets and elections that happen no matter what.

According to Kiplinger, The Stock Trader’s Almanac notes:

“Wars, bear markets and recessions tend to start in the first two years of a president’s term, says The Stock Trader’s Almanac; bull markets and prosperous times mark the latter half. Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year before a presidential election, and nearly 6%, on average, in the election year. By contrast, the first and second years of a president’s term see average gains of 2.5% and 4.2%, respectively. A notable recent exception to decent election-year returns: 2008, when the Dow sank nearly 34%.”

However, this year Kiplinger is noticing a difference:

“The Dow racked up an impressive 27% in the first year of President Obama’s second term, and 7.5% in year two. Last year, which was supposed to be the strongest of the cycle, saw the Dow industrials drop 2%.”

All of this to say, while there are general trends that the market can count on, there isn’t necessarily a rule that is followed, especially during election periods. It should also come as no surprise that in this year of unusual happenings, the market has followed suit.

How Quickly are Markets Historically Affected Post-Election

Now that we’ve examined what happens to the markets before an election, there are behaviors we can expect following it, including who will be inaugurated in 2017. While there’s no surefire way to predict an election, there are some things to look for.

According to Forbes, if the economy is improving, then typically the same party will remain in the White House, and the opposite is true as well. For immediate validation of this, we need only look back to 2008, when Obama was elected because Americans wanted change in a big way. If a change comes after a two-term president though, the S&P normally drops 2.8% on average.

When it comes to the markets, the outcome is also feasibly predictable, depending on whether or not the election itself is predictable. As the numbers show in both the polls and the stock market, that’s not the case this time.

In spite of this election being unpredictable, as the businessman Trump has climbed in the polls, the markets have consistently reacted negatively to his success. This could mean good things for the market if Clinton wins, and bad things if Trump wins, but if that happens and for how long remains to be seen.

How This Election is Different than Previous Years

All elections are different in one way or another, but this one has a whole new set of variables, the likes of which we haven’t seen in decades. To start, Clinton would be the first female president of the United States if she were elected, though the American people are very familiar with her thanks to her experience as a First Lady and Secretary of State.

Trump is the first non-political candidate to make it this far in a very long time, and he attracts a support base who is tired of the Capitol Hill establishment.

Beyond who the candidates are personally though, the market and the election are affected by other things at work. The economy is steadily making its way out of the recession, but hasn’t made it there quite yet. Brexit has affected the markets, and will continue to do so as the policies unfold.

There are also issues abroad, like our continued involvement in the Middle East, that affect performance. Thought, at the end of the day, the most immediate factor affecting the markets will be who is elected.

Dartmouth College economics professor Eric Zitzewitz explains, “If we were to go in 70/30 [for Clinton], and we think the market is 10 percent higher under Clinton than Trump, if Clinton wins it should be up about 3 percent and if Trump wins, it should go down 7 percent.”

Trump’s trade policies would also cause upheaval in the markets, as it would be harder for American businesses to do business abroad.

Wilmington Trust CIO Tony Roth also adds, “There’s no question in my mind that the markets have not priced in a Trump win, only in the most cursory way. They are starting to price in the potential for a Trump win. That process started last Friday. We haven’t seen an up day in the markets since then. We haven’t seen any calamitous days either.”

Most economists agree that an initial Trump victory will result in a sell-off, but there’s no telling what will happen after that, since this election has been unpredictable from the beginning. There’s also the issue of whether or not the House of Representatives will be Republican or Democratic post-election, because economists and investors find concern in the issue that a Republican house may hold up any new policies from Clinton.

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