Financial Markets and the Election

By Kevin Chambers

Many of our clients have asked us the same question in the last few months: “What is going to happen to my portfolio with the November election?”

Since 1928, the S&P 500 has dropped an average of 2.8% in election years. In recent history (1972-2014), the market has increased 10% in election years and an average of 12% in years following elections. That being said, there is very little data that correlates elections to the performance of the stock market. Some data suggests that when new presidents are elected, the stock market underperforms. However, the stock market performance is more closely tied to a faltering economy, which often has the bi-product of also ushering a change in president. In 1980 and 1992, the economy was a significant election topic and the sitting US Presidents lost their reelection bids (Bartles, 2016). In the first example, the year following the election posted a decline of nearly 5%.  In the second example, there was an increase of 10% the following year. However, there is also little indication that party affiliation has anything to do with stock market success (Yahoo Finance, 2016).

One point that can be made is that stock markets do not like unexpected outcomes of elections. When the expected result plays out, the stock market and traders have already processed that information and it is built into current prices. When an unlikely outcome happens, the stock market can react violently. We got a taste of this earlier this year when the UK voted to leave the EU. Most observers and polls had the election won by the collation to “stay” in the EU. When the result of “leave” was announced on June 23^rd, 2016, it sent a shockwave through the world and markets. From the day the news broke until June 27^th, 2016, the US Stock market dropped 4% and international stocks dropped 7%.

However, in events like the Brexit, the stock markets usually rebound once they are able to process the information and price in the change. By the end of the month (June 30^th), US markets had rebounded. By the end of third quarter (September 30^th, 2016), year-to-date US stocks are up 7.8% and International stocks up 1.7%. Brexit was a hit, but it was a short term one. It is also important to note that during the turmoil surrounding the Brexit referendum, diversification worked. In stressful financial markets, investors flee to safety and bonds do well. From June 23^rd to June 27^th, the worst time for the stock markets during Brexit, US bonds were up 1%.

Looking at this election, the major polls indicate one clear outcome. If that outcome holds, the stock market should not react very much. Presumably, traders have already priced in that outcome as it is expected. If there is an unexpected outcome, there may be a stock market blip; however, these are the types of market events our portfolios are built to withstand. Globally diversified portfolios with both equity and fixed income are built to hold through all market cycles. If we see a market event spurred on by the election, regardless of outcome, we expect our clients’ portfolios to perform as expected.

Bartles, M. A. (2016, 26 10). How Presidential Elections Affect the Markets. Retrieved from Merrill Lynch : https://www.ml.com/articles/how-presidential-elections-affect-the-market...

Yahoo Finance. (2016, 10 26). How Do Presidential Elections Affect The Stock Market? Retrieved from Yahoo: http://finance.yahoo.com/news/presidential-elections-affect-stock-market...