How the Presidential Election
Will Affect the Market
Nick Soncrant - Business Development Specialist
With the election on the horizon, a question has come to mind: What should we expect from the market during and after a presidential election? As business owners know, the financial markets have a huge impact on their day-to-day business operations. Access to credit, interest rates, the value of the dollar, consumer spending—all of these factors relate back to the financial markets. With research, I was able to obtain some very valuable information that can help companies turn the often uncertainty of an election year to a more strategic, data-driven mindset about the future planning of their businesses.
U.S. presidential election years bring about more uncertainty than non-election years. Since 1900, whenever a president has served two consecutive presidential terms and has reached year 8 of their being in office, the S&P 500 has dropped an average of 1.2 percent. The returns on average are typically at 6.5% rather than 7.9% in all years.
Uncertainty in upcoming presidential elections can impact market volatility. A lot is going on in the U.S. and around the world: dropping oil prices, turmoil in China’s economy, fears of deflation, and the uncertainty of who America’s next president will be in the upcoming elections on November 8, 2016.
As we look forward to how the market will perform after the election, The Dow Jones industrial average presents some compelling data. It gains an average of 10.4% in the year before a presidential election, and nearly 6%, on average, in the election year. By contrast, the first and second years of a president’s term see average gains of 2.5% and 4.2% per Kiplinger. According to this data, we can expect the market to be slower during years 2017 and 2018 of our next president’s term.
One of the biggest factors and economic indicators for businesses are interest rates. The ability to access credit at a lower rate is a huge advantage for any business.
By taking a look at the interest rates before and after the presidential election, we are able to uncover some interesting trends. According to Nelson Granados, PhD, the graph below shows that the presidential cycle interest rates tend to go down in advance of the next election. On average, interest rates in the last two years of a presidential period are 0.55 percentage points lower than in the first and second years. The graph also shows that most breaks in the interest-rate cycle occur soon after elections. This is consistent with the notion that right after the elections, there can be pressure to raise interest rates to curb any potential inflation.
Questions or comments? Please contact Nick Soncrant at nsoncrant@teamCOACT.com