US Election:
Historical market performance in election years

How do markets react to a presidential election?

Traders and investors alike are concerned about market performance in election years. For equity investors, recent election years have been marked by strong post-vote performance and major stock rallies. Some research even suggests that markets perform better in election years, and you would have to go back to Obama’s 2008 victory to find a risk-off environment around a presidential election. 2008 was an unusual year for global markets, making fair conclusions difficult, and each election takes place in a unique market environment that may not be repeated in subsequent elections.

“The stock market of 2024 is not the same as it was in 2020, much less in 2008, and making predictions from past events is notoriously unreliable”

Drawing conclusions from past elections

We’ve already touched on some of the dangers of making assumptions based on past election results. Long-term studies, looking at over a century of market data and US presidential results, are particularly suspect.

In the last twenty or thirty years, America has changed dramatically, in terms of technology, top industries and businesses, ethnic and religious demographics, and membership of trade unions or political parties. The relative population of each state changes, and the electoral college, which assigns a number of electors based on the population of the state, is updated each election. The policy positions of each major party are not consistent, and over the years different candidates have offered widely variant platforms.

All these changes have a potential impact on the electorate, likely voting patterns, and the structure of the American economy and its robustness in the face of political risk. With that in mind, recent elections can offer some insight into the potential market response to the 2024 presidential election.

Market response to a Democrat victory: Biden 2020

The 2020 election result came in roughly in line with polling and saw the Democrat candidate, Joe Biden win both the popular vote and the electoral college. Early results, in the Midwestern and Eastern United States, appeared to favour incumbent Donald Trump, but as the results came in it became clear Biden had won by a large margin.

Live changes in the FX markets showed a clear strengthening of the US dollar as Biden’s chances of winning improved, and a weakening when results initially appeared to favour Donald Trump. This could indicate greater market confidence in the Democrat nominee, and a movement towards risk off assets such as the US dollar. US presidential elections do not happen in isolation, with congressional, gubernatorial and some senate elections taking place on the same day.

In 2020, Republicans performed much better in these other contests, and some analysts believed markets viewed this as a positive sign for US equities. Historically, the Republican Party was seen as more pro-business, opposing government regulation and high taxes. That means market participants may have thought a balanced Congress would be less likely to pass anti-growth measures. Whatever the causes, the eventual result of the 2020 election was another risk-on environment, with a large rally in US stocks seen in both the DJIA and S&P500 indices.

Market response to a Republican victory: Trump 2016

The 2016 presidential election was very close, with the Democrat candidate Hillary Clinton winning the national popular vote while Trump won enough states for an overall victory in the electoral college. Most polls in the run up to the election indicated a narrow Democrat victory. That means the results, which quickly showed a Trump win, came as a surprise to markets. So, what happened?

In the final days of the campaign, markets were turbulent, with an elevated VIX in US stock markets. After jitters in international stock and forex markets as results came in, American equities began a long rally, with the Dow Jones Industrial Average starting a long bull run that took it above 20,000 points for the first time in January 2017. Though a risk-off environment persisted immediately before the election, with sell-offs as the results first came in, once the results were clear US markets rotated into a firm risk on orientation that lasted well into 2017. In this case, it seems anxiety about an unconventional candidate evaporated once the results were in.

Risk-off market reaction to a Democrat victory: Obama 2008

Democratic candidate Barack Obama won the 2008 presidential election emphatically, with a majority of the popular vote and a large electoral college victory. The election took place against the backdrop of an economic catastrophe, with the US in the midst of the most severe recession since 1929. Markets sold off dramatically the day after the election, with the S&P500 index losing 500 points in one session. It is possible traders and investors were concerned about the tax and regulatory policies of the incoming Democrat administration, but also very likely the election provided an ideal moment to rebalance portfolios to reflect the overall market environment.

Obama 2008 was the last presidential election where markets moved into clear risk off territory following the vote, but the background is too complicated to draw easy conclusions. It must also be remembered the US has changed significantly since 2008; adding 41 million people to its population and moving from a GDP per capita (at PPP) of $48,000 to $81,000. These structural changes make it difficult to compare market reactions across elections.

Conclusion: a fair comparison?

The two most recent presidential elections resulted in strong equity markets for the rest of the year. It is tempting to conclude the same could happen this time, regardless of whether Kamala Harris or Donald Trump becomes the 47th American president. However, these comparisons are dangerous, because each election takes place in a unique historical context. The stock market of 2024 is not the same as it was in 2020, much less in 2008, and making predictions from past events is notoriously unreliable.

Even so, it is not useless, and traders have much to learn from past elections. Rather than making simple predictions about market gains or losses, traders should consider the same factors their colleagues did in those elections: political risk, the balance of presidential and congressional results, and the overall market environment.

Elections are flashpoints for volatility, and the run-up and aftermath of the 2024 vote will see portfolio rebalancing across markets. Traders can’t read the past like a book of predictions, but they can instead use it to understand the unique context of each election and adjust their positions accordingly.