August 2, 2024

How Markets Typically Respond During the Last 3 Months of a Presidential Election

The final stretch of a U.S. presidential election is a period marked by heightened political uncertainty, often leading to volatility in financial markets. Investors and analysts closely monitor economic indicators, campaign rhetoric, and potential policy shifts that may impact the economy. Historically, the stock market’s performance in the three months leading up to the election has varied, influenced by factors such as the incumbent’s perceived chances of reelection, the economic environment, and global events.
Historical Market Trends in Pre-Election Periods
1. Incumbent Party Reelection
When the incumbent party is perceived as likely to win, markets often exhibit more stability, driven by the expectation of continuity in economic policy. Historically, markets have generally performed better during elections where the incumbent party wins, as seen in the elections of 1984 (Reagan), 1996 (Clinton), and 2012 (Obama).
  • 1984
In the months leading up to Ronald Reagan’s reelection, the S&P 500 rose by approximately 6%. Reagan’s pro-business policies and economic recovery contributed to investor confidence.
  • 1996
During Bill Clinton’s reelection campaign, the S&P 500 saw an increase of around 8%. The booming economy and balanced budget projections provided a favorable backdrop for the market.
  • 2012
The market remained relatively stable, with the S&P 500 gaining about 2% as Barack Obama secured his second term. The market was buoyed by ongoing monetary stimulus and gradual economic recovery post-2008.
2. Challenger Wins
Markets tend to react with more volatility when the challenger is seen as likely to win, driven by uncertainty about potential policy changes. This was evident in the elections of 1980 (Reagan), 2008 (Obama), and 2016 (Trump).
  • 1980
The S&P 500 experienced significant volatility and ended up losing about 2% in the three months leading to Ronald Reagan’s victory over Jimmy Carter. The economic backdrop of stagflation and the Iran hostage crisis added to market uncertainty.
  • 2008
As Barack Obama ran against John McCain during the global financial crisis, the S&P 500 plummeted by nearly 20% in the three months before the election. The market was heavily influenced by the collapse of Lehman Brothers and the ensuing financial turmoil.
  • 2016
In the months leading up to Donald Trump’s unexpected victory, the S&P 500 remained largely flat, reflecting the market’s uncertainty about the outcome and the potential implications of Trump’s policies. Post-election, the market rallied sharply, driven by expectations of tax cuts and deregulation.
3. Economic Conditions
The underlying economic conditions leading up to the election play a significant role in market behavior. For instance, during periods of economic expansion, markets have generally performed better, as was the case in 1996 and 2012. Conversely, during recessions or economic slowdowns, markets tend to be more volatile, as seen in 2008 and 2020.
  • 2020
Amidst the COVID-19 pandemic and economic downturn, the S&P 500 saw significant volatility in the months leading up to the election. Despite the uncertainty, the market ultimately posted gains, driven by optimism about fiscal stimulus and vaccine development.
4. Market Predictability
Historically, the performance of the stock market in the three months leading up to the election has also been viewed as a predictor of the election outcome. According to the “Presidential Election Cycle Theory,” if the market is up during this period, the incumbent party is more likely to win. Conversely, if the market is down, the challenger is more likely to emerge victorious. This trend held true in several elections, including 1980, 2008, and 2016.
Factors Influencing Market Behavior
Several factors contribute to market behavior in the final three months before a presidential election:
  • Policy Uncertainty
Investors grapple with the uncertainty of potential changes in fiscal, regulatory, and foreign policies depending on the election outcome.
  • Campaign Rhetoric
Candidates’ positions on issues such as taxes, trade, healthcare, and climate change can significantly impact market sectors differently, leading to sector-specific volatility.
  • Economic Indicators
Data on employment, inflation, GDP growth, and corporate earnings leading up to the election influence investor sentiment and market performance.
  • Global Events
Geopolitical tensions, pandemics, and other global crises can exacerbate market volatility during the election period.
Conclusion

The three months leading up to a U.S. presidential election are often characterized by market uncertainty and volatility, as investors weigh the potential impact of the election outcome on economic policies and the broader economy. Historical data suggests that markets generally perform better when the incumbent party is expected to win, driven by the expectation of policy continuity. However, external factors such as economic conditions and global events can significantly influence market behavior, making each election cycle unique. Investors typically brace for a bumpy ride during this period. During this period, it is important to realize that the US Presidential Election occurs every four years and the US Mid-term Elections occur every two years. Therefore, drastically changing your portfolio based on whether your individual party is in the White House today has never been a good strategy. Rather, focusing on Economic Growth (measured by GDP and unemployment), Low Inflation and Low Interest Rates, Strong Corporate Earnings, Investor Sentiment and Government Policies and Fiscal Measures will have a greater impact on the stock market’s direction. Long-term investors should focus on a company’s potential to increase its profits over many years, which ultimately drives stock prices higher in the long run.

Our commitment at Massey Romans Capital is to analyze the economy, markets, policies and what they mean for our investors. This is where our team will focus its energy and attention.
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The S&P 500 is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.

BRM Investment Management (“Massey Romans Capital”) is an investment adviser registered under the Investment Advisers Act of 1940. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. Although taken from reliable sources, the Firm cannot guarantee the accuracy of the information received from third parties.

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