Political Impact on the Market

Paul Miller |

Economic markets are volatile environments wherein a strengthening US Dollar can mean problems for the market as American goods become more expensive overseas. While a drop in the value of the dollar can lead to slow-downs at home, as exports increase by spending at home decreases as goods become costlier for average consumers. There are many factors that impact the market on a daily basis, but are political events among them?

The answer is, without question, a yes. As the Financial Times points out, look no further than the June 2016 vote in the United Kingdom on Brexit. When Britons decided to end their association with the European Union as a member state, it ushered in an era of uncertainty. The Times pointed out that the biggest concern is the uncertainty over "having no functioning government, no effective opposition, and no formal plan for Brexit." The belief is this will lead to households and companies halting spending decisions until things become more clear.

In the immediate aftermath, gold and silver prices skyrocketed amidst those concerns and the Pound took a nosedive to depths not seen in more than three decades. How does all of this occur?

Global Stage

Elections, especially in the United States, generate worldwide attention in the modern era. As a superpower that impacts global policies and whose market dictates global market trends, elections in the United States have a tremendous impact on the major economies of the world. History has shown that leading up to presidential elections, uncertainty in the outcome or distrust of the candidates among Americans (as well as global citizens) can hamper markets.

By in large however, CNBC found that market gains are often associated with political elections. For example, between May and the close of October in election years, the S&P 500 has rallied higher in 19 of the last 22 elections in the US; that's 86% of the time. The average gain was 6.2%.

Kiplinger offers an even more engaging look at markets at elections. For the past 182 years, stock markets have ebbed and flowed with great predictability during the four-year election cycles in the US. Wars, bear markets, and recessions were found to occur most often in the first two years of a presidential term, while bull markets and prosperity tend to highlight the second half of a presidential term.

For example, since 1833 the Dow Jones Industrial Average has gained 10.4% in the year before an election, 6% in the year of an election, but slowed to 2.5% and 4.2% during the first two years of a term.

What to Look for in a New President

As an investor, there are a number of factors that you should look for in a new president to help you determine the direction of the country and the global market moving forward. Among the most important are foreign policy, unemployment, public vs. private sector tendencies, fiscal responsibility, and regulations.

President-elect Donald Trump was viewed as a threat to the global market and a potential instigator of trade wars with his talk of pulling the U.S. out of NAFTA and blocking TPP, as well as labeling China a currency manipulator. These are a combination of foreign policy decisions, reactions to unemployment in America's blue-collar sector, and a matter of prioritizing fiscal responsibility in the U.S. by minimizing the public sector in favor of less regulation on the private sector.

While most have predicted disaster, so far, the Dow has been soaring to new heights in the weeks following Trump's election victory, with daily records being set and the Dow closing in on a landmark 20,000 points.

Guessing Game

In the end, determining what is truly going to come from any political election is left to speculation. As the Economist notes, in the period between election results and inauguration, markets anticipate what will occur and price in the outcome of expected policy changes. The reason that the first two years of a president's term are often slower or lower in the markets is a result of the reaction to actual changes compared to early results from anticipated changes.

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