Every four years the lines between the world of finance and politics are blurred when US citizens elect a new president, and investors try to come to grips with how it will impact their portfolio. A study of past elections by The Stock Trader’s Almanac, reveals that bear markets and recessions generally begin within the first two years of a president’s term, whereas bull markets and growth normally take place in the last two years.
Despite the fact the US president can’t directly control the stock market, serious amateur and professional institutional investors openly acknowledge the impact of politics on the market. So it will come as no surprise that numerous investors were avidly watching last nights’ presidential debate between the Republican candidate Donald Trump, and the Democratic candidate Hillary Clinton, to see who gained the early advantage in this neck and neck race to become America’s next leader.
Prior to the event we were informed that the market reaction to the debate would depend on the proposals put forward by each candidate and how well their policies stand up to questioning by their opponent. Brad McMillan, chief investment officer at Commonwealth Financial Network, stated in emailed comments: “One thing markets will be watching for is whether either of the candidates come across as, for lack of a better word, scary.”
Although the full extent of a Trump or Clinton presidency will take many years to gauge, we can use historical information to predict the impact it will have on the US stock market. Historically, the stock market has performed better under the guidance of Democratic presidents rather than their Republican counterparts, therefore a win for Hillary would signal good news for the Dow and the S&P 500.
In an article by Mary Ann Bartels, Head of Merrill Lynch Wealth Management Portfolio Strategy she informed us that the Standard & Poor’s 500 which is a commonly watched benchmark of American large-cap companies has fallen by 2.8% on average during election years where the current president cannot run for reelection. Conversely, in years where the current president has been up for reelection, the S&P 500 has yielded impressive average returns of 12.6%.
Whoever wins the electoral race will shape the future of healthcare, tax and immigration for the next four, and possibly eight years, and investors will frantically be trying to work out how the outcome of the US Elections will affect the stock market as well as the entire global economy.
Next week we will look at how a US presidential election result can affect commodity prices.