How the Markets Are Affected by the U.S. Elections

With the U.S. presidential elections right around the corner, I thought it would be fun to do a historical post about U.S. elections and how they can affect the markets. I did a deep dive and learned a lot. Here is some fun stuff I picked up.

Let's dig in...

Historical Market Performance and Presidential Terms

1. Since 1928, 19 out of 23 presidents have seen positive stock market returns during their tenure.
   
   We are using the Dow as a benchmark because its much older then the Nasdaq and S&P 500 👴
   

2. The average stock market return across all presidential terms has been an impressive 72%.
   

3. Top performers by Dow Jones Industrial Average growth:

   • Calvin Coolidge: 230.5%

   • Bill Clinton: 228.9%

   • Franklin D. Roosevelt: 198.6%

Interestingly, research by Jeremy Siegel - Professor of Finance at Wharton, shows:

• Democratic administrations: 10.6% average real stock market returns

• Republican administrations: 4.8% average real stock market returns

It's important to note that the presidency is not directly connected to stock market performance. Congress controls government spending, while the Federal Reserve sets interest rates and monetary policy. However, correlated patterns have emerged over the years.

The Presidential Election Indicator

Ironically, the market seems to be a simple yet historically effective indicator for predicting election outcomes.

The indicator is the S&P 500 Index performance in the three months leading up to Election Day:

• S&P 500 trending higher: The incumbent party usually retains the White House.

• S&P 500 trending lower: The incumbent party usually loses.

This “Indicator” has been remarkably accurate:

• 83% accurate since 1928 (20 out of 24 elections)

• 90% accurate since 1984 (9 out of 10 elections)

For this 2024 election, the key level to watch is $5,200 (opening price on Aug 6th) on the S&P 500 Index:

• Above this level may favor the Democrats

• Below this level may favor the Republicans

• We are about 12% above this level currently

Notable Exceptions

The Presidential Election Indicator has failed only four times since 1928 😮:

1. 1956: Eisenhower re-elected despite S&P 500 falling 3.2%

2. 1968: Nixon won despite S&P 500 rising 6%

3. 1980: Reagan won despite S&P 500 rising 6.9%

4. 2020: Biden won despite S&P 500 rising 2.22%

These exceptions often coincided with significant economic or geopolitical events.

The Misery Index: A Complementary Indicator

While the Presidential Election Indicator provides historically significant insights, the Misery Index offers an additional perspective on economic conditions that can influence election outcomes and market performance.

Average Misery Index by U.S. President

Key points about the Misery Index:

1. Calculation: Misery index = Seasonally Adjusted Rate of Unemployment + Annual Inflation Rate.
   Originally called the Economic Discomfort Index.

2. Predictive Power: A high Misery Index often signals potential trouble for current administrations.

3. Historical Significance: The index has been particularly relevant in years when the Presidential Election Indicator was incorrect (1956, 1968, 1980, and 2020).

4. 1980 Election Example: Ronald Reagan effectively campaigned on the Misery Index, stating, “The higher the index, the more is the misery felt by average citizens.” This resonated with voters despite positive stock market performance.

5. Voter Behavior: High Misery Index values tend to correlate with voters seeking change, often manifesting as a shift away from the incumbent party.

The Misery Index provides a broader economic context beyond market performance:

• It captures the financial experiences of average citizens, which can significantly influence voting behavior and, consequently, market trends.

• Consider tracking the Misery Index alongside the S&P 500 performance and government spending relative to GDP for a more comprehensive economic view.

• This multi-faceted approach can help inform investment decisions during election cycles, particularly when market indicators and economic realities seem to diverge (like right now 😅).

Economic Strategies used in Election Years

As elections approach, current administrations often deploy strategies to stimulate the economy, potentially influencing market performance. This phenomenon, known as the “election year stock market rally,” can create unique market environments.

Key administration strategies and their impacts:

1. Increased Government Spending:

   • Focus on public projects and social programs

   • Can boost specific sectors like infrastructure and healthcare

2. Tax Cuts:

   • Aimed at increasing disposable income and consumer spending

   • May benefit retail and consumer discretionary sectors

3. Accommodative Monetary Policies:

   • Potential for lower interest rates or quantitative easing

   • Often leads to increased liquidity in financial markets like we are seeing now

These actions typically inject liquidity into the economy, potentially driving up stocks. These boosts may be temporary obviously, with corrections post-election being common place.

Thank you for reading,

- John