How the US election is affecting stock markets

How the US election is affecting stock markets

The US presidential election will be held on Tuesday 6 November, with the vote count coverage becoming more conclusive during Australia’s trading session on Wednesday 7 November. Timothy Radford, a member of the Rivkin Investment Team, came across some historical data that suggest that one can get a sense of where the market might go after the election, assuming a given outcome.

What usually happens during an election year?

According to Citigroup research, the fourth year of a US presidency--which we are now in--results in a mean average S&P 500 return of 7.77% and a median return of 10.39%, excluding dividends.  As at the publication date of this piece, the S&P 500 is up by 10.65% - sitting right around the median average.

In 2008, of course, this generalisation--which had offered a positive result all but two years during this data period--proved very wrong, with the S&P falling from 1,447.16 to 903.25, or -37.6%.  We can all remember the “Can the stock market go to zero?” headlines.

Rivkin has dug a little further and conducted extensive research on the Dow Jones Industrial Average, which allows us to look at a longer time frame, from 1900 to the last presidential election in 2008.  We’ve created a chart out of this research, which appears in this Insights piece.

Given that the moderate volatility in the last couple of sessions seems to have been brought about by weaker than expected corporate earnings in the US, we are not presently experiencing the type of extraordinary circumstances that we were in the GFC-ridden 2008 calendar year.  That said, this election is a fight over who can best lead the US out of economic circumstances characterised by high debt and high unemployment, so the stakes are high to create meaningful transformation, which could unsettle markets if an administration change comes into effect.

What does history suggest will happen if the incumbent (President Obama) government wins?

Given the delicate recovery the US is experiencing, a business-as-usual approach to government could be welcomed by the market; even those businesses that are far more conservative than the current Democrat government could welcome stability at a time when economic data is relatively sound.

As illustrated in the chart, history suggests that an Obama win would point to an end-of-year rally that would outpace the mean average election year.

What does history suggest will happen if the challenging (Governor Romney) government wins?

Mitt Romney, nominee of the opposing Republican party, has been a proponent of government stimulus and an opponent of tax cuts in the past, but his campaign for this election promises less tax for small business, continued tax relief for high-income earners and he is a signatory to the ‘cut, cap and balance’ pledge that requires major spending cuts to government in exchange for debt-ceiling relief.  So an administration change could be quite unsettling for markets.

As illustrated in the chart, history suggests that a Romney win would point to a stagnant-to-weaker market between November and the end of December.

How should investors prepare for this event?

More volatility could enter financial markets due to the very close national US polling numbers, even though on a state-by-state poll basis, Obama is still the clear favourite.  The way Rivkin combats global events like this is to listen closely to the market, rather than make predictions based on averages.  So Rivkin Global, our Global advice and dealing product, will continue to take short-term views on how individual instruments will change in price, based on the behaviour of the investors buying and selling those instruments.  In a sense, we welcome volatility that might take us out of the US trading range that we have been stuck in since August of this year.  Rivkin Local, which takes its steady income returns from ASX-listed strategic model portfolios and short-term returns from corporate events, will continue in a business-as-usual fashion, as it too aims not to predict the future, rather it invests in situations that tend to perform irrespective of broader market cycles.

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