How is the Stock Market Affected by Presidential Elections?
With the recent election of Donald Trump to the presidency and the subsequent fallout reflected in the stock market, you may wonder why this happens (and it DOES happen every time a new president is elected). While some elections dictate more of an effect than others, this phenomenon isn’t too hard to figure out. After all, investors are naturally skittish, and any big change, like a new president of the United States, will shake that confidence to the very core.
Finances and politics go hand in hand, and nowhere is that more evident than in the presidential cycle. The stock market fluctuates according to the four-year election cycle – something it has been doing for nearly 200 years. In fact, the first two years of a presidency are usually when wars, bear markets and recessions occur. That said ,the cycles have been getting out of whack in recent years.
When it comes right down to it, your portfolio doesn’t care if there’s a Republican or a Democrat in the White House. Yes, stocks have historically done a bit better under Democrats but that gain is cancelled out by normal variations in annual stock market returns, says Kiplinger.
Some also say that the stock markets fare better when the government is divided, with the thinking being that if neither party is in control, the markets have more room to flourish. However, the stats don’t always reflect this. In fact, during the first two years of a president’s term, Standard & Poor’s 500-stock index gains nearly 17 percent when one party controls the White House and both houses of Congress; about 16 percent when one party controls both houses of Congress and the other party controls the White House; and just about six percent when the House and Senate are divided.
While it may seem election result sway stock market returns, history doesn’t prove this theory. The more likely scenario is that if the stock market is enjoying growth and potential in the few months before an election, it’s a good bet the incumbent party will win. If those few months show losses, a new party is likely to take over. Out of the last 22 elections, 14 showed gains in the three months prior to the election, and 12 of those 14 featured a winning incumbent.
None of this is set in stone, of course. It’s simply too soon to see how this most recent election will play out in the stock markets, although it’s a fairly certain bet we can all expect volatility for a while until things shake out. Keep being diligent about checking up on your investments, and keep a close eye on your broker. Call a stock fraud lawyer if you suspect foul play.