How Will The Upcoming U.S Election Influence The Stock Market?

The political temperatures in the U.S have been quite high over the past few months, and there are just a few days to the presidential elections. Investors have been keeping an eye on how things have been unfolding, and for a good reason. Historical data shows that the stock market demonstrated predictable performance patterns over every election year for the past 90 years. This historical data may provide a rough idea of what to expect from the stock market before and after the elections.

Before we explore the historical data and its significance, it is important to understand why the stock and financial markets are affected by presidential elections. Investors decide on whether or not to purchase a stock based on the probabilistic performance of that stock. For example, a stock is likely to drop in value when the overall markets are not favorable and when there is uncertainty. It is also likely to gain when the outlook is favorable and when policies are also in favor. This fundamental outlook is often combined with technical analysis when making the decision whether to buy or sell a stock

The stock market’s historical performance during election years

Analysts evaluated stock market data, specifically the S&P 500 from its performance back in the 1930s all the way to 2020, so basically its performance for 90 years. They found interesting recurrent patterns that appear around every election year. The analysts discovered that the bonds and equities markets tend to slow down or have less trading activity during the election year. According to Tom Hainlin, an investment strategist for a major U.S bank, the equity markets tend to underperform around the time of a general election.

Analysts observed that equities usually gain about 8.5 percent within a 12-month period, but the gains drop to about 6 percent during an election year. The same applies to the bonds market, which usually delivers around 7.5 percent at any given 12-month period, but the gains are lower at an average of 6.5 percent during the election year.

What happens to the stock market when the elections are over?

Various outcomes may happen after an election. The first is that things will start getting back to normal. Of course, the outcomes of an election are significant because the winning party's policies influence the business landscape, and this is something that investors consider. However, the best way to predict possible outcomes in the future is, once again, to observe the past. Historical data also shows that the stock market recovers relatively slowly the year after elections, while bonds tend to rally faster. They also discovered that this is the case, regardless of which party takes the win.

The reason for the stock market's predictable performance during the election period or election year is that investors tend to be cautious. The lower market performance during the election year means most of the investors hold off trading, and then they get back in the game as soon as things get back to normal. Smart investors can also use this knowledge to determine when to enter the market and when to exit.

The unusual case of the 2020 elections

The 2020 election is unique because of the coronavirus occurrence, which had a major negative impact on the stock market performance. Many stocks lost a significant chunk of their value as businesses temporarily shut down their operations. The economic downturn experienced this year was thus heavily influenced by the viral pandemic and not the result of overextended economic performance. As noted earlier, the president that ruled during an economic downturn or recession has historically not been re-elected. Thus the unique dynamic for the current president.

There are also other dynamics to consider about the upcoming election. The two main candidates for the election are Joe Biden, who is riding on the Republican Party ticket, and the incumbent President Donald Trump, who is on the Republican corner. Trump’s trade policies have so far kicked off a trade war with China, and technology companies have been on the receiving end. However, his policies have also been good for local businesses, as well as local entrepreneurs.

Biden plans to take an approach that will help technology companies to thrive and so the two different approaches might have a notable income on the performance of various sector stocks in the U.S. The best approach for investors, especially in the long-term, is to build a diversified portfolio that will help spread the risk and any uncertainties moving forward. Regardless of who wins the presidential elections, there will be policies that will affect industries differently. In any case, the current situation presents a chance for investors to take a step back and evaluate their investment decisions moving forward.

The fate of the stock market with the pandemic still ongoing

There are also investment opportunities available, especially given the unique mix of market factors this year. For example, the markets, especially the securities segment, have been recovering gradually from the COVID-19 induced downturn. However, investors should still be wary of the fact that the pandemic is still ongoing. If the presidential elections were to be concluded smoothly and a vaccine for the coronavirus was released shortly after, it would be great news for the stock market. The business environment would no longer operate on the fears of another potential lockdown, and things would start aligning in the right direction.

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