The Presidential Election: How Will It Impact Financial Markets?
With the U.S. Presidential election now less than a month away, investors worldwide look to political headlines to try and understand what the impact might be on financial markets. The battle between Hillary Clinton and Donald Trump has continued to intensify this fall, both through heated rhetoric and a seemingly endless 24 hour news cycle.
While it is easy to get caught up in the political excitement (and its inherent volatility), the impact of the election on financial markets is likely to be more muted. Put simply, the Presidential election, while an important political event, is unlikely to have much long-term effect on the U.S. stock market.
Short-term market swings from an unexpected election outcome are always a possibility, but longer run equity prices are far more reliant on the health of the economy, and the profitability of companies, than on the Presidential party elected to the White House.
Presidential election history shows us that there are relatively few conclusions that can be easily drawn. A common stereotype is that Republicans are good for business. It would be easy to infer from this that electing a Republican president would create better stock market conditions—and if we include data since 1900, that is actually the case. But according to S&P Capital IQ, since 1945 the average annual gain for the S&P 500 under a Democratic president is 9.7%, while the average annual gain under a Republican president is 6.7%. More recent data suggest that Democrats are actually better for the stock market. The bottom line—is it difficult to make any reasonable forecasts on the direction of the stock market based upon the political party in office.
What gets lost in the noise is that Presidents often get too much credit—and too much blame—for short-term economic conditions. For example, Bill Clinton was in office during one of the greatest economic expansions in U.S. history: the 1990’s technology boom. He received credit for the growing U.S. economy, but the reality was much more nuanced. Much of the boom in productivity and economic growth was a result of burgeoning computer, technology and mobile phone use, inputs whose genesis was actually in the Reagan years.
The simple truth is that even if we knew the outcome of the election today, before it actually happened, it would be difficult to know what its effect would be on the stock market. If Hillary Clinton wins, might the markets go up? Absolutely. But they could also go down.
The U.S. economy’s health is the most important ongoing consideration. Under either candidate, if economic growth begins surprising to the upside, we will likely experience better stock market returns and higher bond yields. Conversely, a deteriorating economy, either during a Trump or Clinton presidency, will have the opposite effect.
We do know that markets prefer stability to the unknown. Hillary Clinton is often viewed as the more stable election choice, as she is a “known quantity” with a longer political history. Donald Trump is viewed as more of an unknown, as he is a political outsider with fewer established views on issues like foreign policy. It is reasonable to believe that the markets may welcome stability in the short-term, though the longer term effects of either candidate’s victory are much less clear.
Regardless of who wins the election in November, the elimination of uncertainty is likely to be a net positive for financial markets. Enjoy the political season, but don’t expect its outcome to drastically impact long-term returns in the markets.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.