Historically, market uncertainty in the lead-up to and immediately following a US election is common. The mainstream media is fond of catastrophising fluctuations that are a normal and healthy part of the investing cycle, so one of the critical skills for an investor in the current climate is being able to recognise short-term volatility and reacting with calmness.

Fluctuations driven by market sentiment tend to dissipate quickly, in VanEck’s opinion. Donald Trump’s first election win in 2016 is a textbook example. The Trump victory triggered a widespread sell-off that wiped nearly 900 points off the Dow Jones index overnight. Within a few hours, the market rebounded, and it made a full recovery in a few days. 

The uncertainty surrounding the 2016 election was far more muted on the S&P/ASX 200 Index in Australia, as Chart 1 below shows.

On the evening that election results were being finalised in the US, our market was open (9 November 2016 AEST), and the S&P/ASX 200 hit a low of 5,052.10 – a 3.9% fall from the previous close. However, by the end of the day, the ASX 200 had recovered to close at 5,156.6, and it continued to climb over the rest of the month. 

Chart 1: S&P/ASX 200 in November 2016

Source: VanEck, Morningstar. Past performance is not indicative of future results. LHS data is index level. 

The potential interplay between US presidents, capital markets and economic cycles is interesting. A quick look at the performance of the S&P 500 Index in the US during each four-year term does not present any obvious trends, but a closer look suggests a few possible patterns. 

Election years have traditionally been positive for US stock markets. Chart 2 below shows the S&P 500 rose in nearly every election year since 1960, with the exceptions of 2000 and 2008. 

The last three election years in 2012, 2016 and 2020 were strong, with the index rising by at least 10%, as Chart 2 shows. Is there a correlation? The data is inconclusive. The Olympic Games also happen every four years, so one could equally suggest that the Olympics impacts positive stock market performance. 

Chart 2: Historical returns for S&P 500 on US presidential election years

Source: YCharts, VanEck. Period is 1 Jan – 31 Dec for the year identified in the bottom axis descriptor. Returns shown are total returns (share price returns + dividends) and are in USD. You cannot invest directly in an index. Past performance is not indicative of future performance.

Looking at Australia’s All Ordinaries Index, we can see a few parallels. But more often than not, the returns of the Australian bourse during US presidential years did not follow the patterns of the S&P 500, as Chart 3 below shows.

Chart 3: Historical returns for All Ordinaries Index on US presidential election years

Source: Market Index, VanEck. Period is 1 Jan – 31 Dec for the year identified in the bottom axis descriptor. Returns shown are total returns (share price returns + dividends) based on the All Ordinaries Accumulation Index (XAOA) and are in AUD. Past performance is not a reliable indicator of future performance.

Looking to the years after the US election, the data could also indicate that markets have performed better under Democratic president terms compared to Republicans, with the S&P 500 gaining an average of 11.5% per annum and 7.1% per annum (across a four-year period) respectively, as Chart 4 below shows. (The red bar in the chart shows Republican presidents; the blue bar shows Democratic presidents).

Chart 4: S&P 500 price change by party

Source: VanEck, YCharts. Four-year index price performance, in US dollars. You cannot invest directly in an index. Past performance is not a reliable indicator of future performance. 

However, according to VanEck analysis, most of the major crises and conflicts in US history have occurred while a Republican was in power.

That is not to suggest Republican presidents were responsible, but rather points out the unfortunate timing to be in the White House. George W Bush suffered the triple whammy of the dot-com boom from the late 90s, the September 11 terrorist attacks in 2001 and the Global Financial Crisis in 2008. Nixon’s second term aligned with the Great Inflation of the 1970s.

Many factors affect markets

The difficulty of isolating the impact of US elections and presidents on the S&P 500, or the S&P/ASX 200, to the exclusion of dozens of other variables that can impact stock prices, means it isn’t possible to draw conclusions about the effect of US elections on sharemarkets.

Perhaps the more pertinent insight is that the upcoming election might not itself pose long-term risk for investors. We often say, it’s time in the market, not timing the market. 

One could go so far to say that the power dynamic potentially works the other way. Prevailing economic conditions have been shown to exert significant influence over voters. The US Federal Reserve decisions on interest rates could potentially sway some voters. In the event it holds interest rates steady, Trump might find more people favouring his pronounced focus on domestic policy. 

By and large, capital markets are far more affected by the actions of central banks, which use monetary policy to manage the country’s inflation levels. The power of central banks would come as no surprise to anyone in Australia, given the challenges we’ve experienced with the prolonged interest rate tightening cycle. 

One could reasonably argue that developments for the local economy would have considerably more bearing on Australian capital markets than the outcome of US elections. 

But that is not to say the actions of the US president are inconsequential for the financial markets globally. There is ample precedent of previous presidents exercising substantial influence over market sectors and asset classes. 

In 1971, Richard Nixon’s decision to suspend the convertibility of the US dollar into gold remade the global monetary system. More recently, ‘Trump Trades’ (technology, financials, industrials and energy stocks in the US) experienced significant gains during Trump’s first term, with this presidential support helping lift the S&P 500 nearly 50% from the beginning of his term to the start of the COVID-19 pandemic (2016-2020). 

Conclusion 

In VanEck’s opinion, Trump and Kamala Harris’s stance on issues from climate change and migration to taxes and trade agreements could potentially impact stock market performance. However, it would be premature to comment on these until policies are formally announced. 

A lot can change between now and then. Let us not forget Liz Truss, whose legendary stint as UK Prime Minister lasted a mere 49 days, during which time she managed to bring the UK to the brink of recession and triggered a financial crisis affecting pensions, bonds, mortgages, the British pound and gilts. 

In VanEck’s view, this was an extreme, unprecedented incident that is unlikely to be repeated any time soon. But there will certainly be political changes coming up that investors in the Southern Hemisphere chould monitor closely. 

DISCLAIMER

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