The historical impact of US elections on global market stability

US presidential elections and stock market impact

US presidential elections are not just significant political events; they substantially impact the stock market. Historically, the different phases of the US presidential cycle have shown varying effects on market performance:

• Post-election year
• Midterm year
• Pre-election year
• Election year

Pre-election and election years tend to yield the highest returns, while post-election and midterm years often bring more uncertainty and volatility. These cyclical patterns, coupled with specific market reactions to election days and power transitions in the White House, provide valuable insights for investors and traders.

US presidential cycle and stock market performance

The US presidential cycle can be divided into four phases as mentioned above. Pre-election and election years are typically the most successful for US stock markets. In 48 presidential periods since 1833, these years have demonstrated significantly better market performance compared to post-election and midterm years.

US presidential elections have profound impacts on the economy and financial markets:

• Wars, recessions, and bear markets tend to begin or occur in the first half of the term (as seen with the Russia-Ukraine war and the bear market of 2022)
• Prosperous times and bull markets are more likely in the second half during pre-election and election years.

Market reactions on election days

The table below illustrates the price reactions of the S&P 500 on election day and the following day since 1928:

• On election day: the S&P 500 posted an average positive return of 0.92% with a hit rate of 77%. This indicates general market optimism and positive investor expectations

• The day after the election: the broader S&P 500 posted an average negative return of -0.71% with a hit rate of 65%. This suggests that initial euphoria often gives way to a correction or sobriety.

Until 1980, US financial markets traditionally remained closed on election day, allowing voters and market participants to participate in the elections. However, markets have remained open since then. These trends highlight that while election years can offer long-term positive returns, short-term volatility may also occur, which investors and traders should take into account.

S&P 500 performance on US election day and following day since 1928

Corrections after US presidential elections?

A change in power in the White House has often led to a market low within two years over the last eight decades. Here are the years where this pattern was observed:

• Change in power: 1960, 1968, 1976, 1980, 1992, 2000, 2008, 2016, and 2020

  • Exception: 1994 (Dow Jones: -2.56%)

Even when incumbent presidents remained in office, US markets frequently reached their low point within two years. The years include:

• Incumbent presidents: 1964, 1972, 1984, 1988, 1996, 2004, and 2012

  • Exceptions:
    • 1984 (market low after three years)
    • 2004 (market low after one year)
    • 2012 (no low point due to quantitative easing)

If this pattern repeats in the future, the next significant market low could be expected in 2025 or 2026.

S&P 500 monthly chart

The presidential indicator as a forecast tool

When the S&P 500 rises between 31 July and 31 October in US election years, the incumbent president retains power in 11 out of 13 election years, or 85% of the time since 1936. A negative performance of the S&P 500 in this three-month period before the election has led to a change in power in 8 out of 9 years, corresponding to a success rate of 89%.

Exceptions to this pattern occurred in 1968, 1980 and 1956. Based on market performance so far this year, the indicator currently points to a Democratic victory.

In summary, the historical analysis of US presidential elections and their impacts on the stock market reveals recurring patterns and offers valuable insights for investors preparing for future market movements.

What’s on the horizon for the global bond markets?

The 2024 US presidential election is just around the corner. As the world's largest economy with unparalleled influence over global trade, economic outlook and geopolitics, the process and outcome of the 2024 event are poised to create ripple effects that impact interest rates, inflation expectations, and ultimately bond markets globally.

Uncertainties and haven demand

The presidential election in the most influential nation, with over 300 million people, will inject significant policy uncertainty both domestically and globally. Investors in global bond markets are highly sensitive to these uncertainties. Bonds, especially US Treasuries, which are typically viewed as safe-haven assets, are likely to see rising demand during this period of turbulence. For instance, in 2000/2001, the yield on the US 2-year bond dropped nearly 60% in the 12 months following the election.

US 2-year vs. US 10-year bond yield

Fiscal policies and their impact on bond yields

Changes in fiscal policies can significantly influence bond markets in various directions:

• Increased political and economic risks: if the future leader of the US introduces higher political and economic risks into the world's largest economy, investors may demand a higher risk premium, pushing yields upwards.
• Aggressive fiscal spending: a candidate advocating for aggressive fiscal spending might increase debt, inflation, and interest rates. This, in turn, could raise bond yields as investors adjust to the anticipated inflationary period and seek higher returns.
• Impact on international markets: in such a scenario, bond markets outside the US may become more vulnerable due to the attractiveness of a stronger US dollar and the potential for capital reallocation. This shift often leads to repricing across international bonds, including German Bunds and Japanese Government Bonds (JGBs). (Refer to the comparison chart between US 2-year bond yield and JGB 2-year yield below).
• Conservative fiscal policies: conversely, a more fiscally conservative candidate could alleviate inflation concerns, helping keep bond yields lower.

For example, following the 2016 US election, the yield on the US 2-year bond surged 96% in a year, from 0.88% to 1.51%. This was attributed to President Trump’s economic strategy, which emphasised fiscal stimulus, including large-scale infrastructure spending, tax cuts, and deregulation.

While these policies were anticipated to boost economic growth and favour equities, they also elevated inflation and increased government borrowing.

US 2-year bond yield vs. Japanese Government Bond (JGB) 2-year yield

Geopolitical and trade implications

Another key aspect through which the US election could influence global bond markets is the future administration's trade policy. A strong focus on protectionism or trade barriers, as demonstrated by both the Trump and Biden administrations, can escalate global trade tensions, disrupt supply chains, and raise costs, fuelling inflationary pressures.

These risks often lead to volatility in global bond markets as investors reassess their exposure to trade-reliant economies. Countries heavily tied to US trade and geopolitical policies, such as China, Mexico, and Canada, are likely to face heightened bond market fluctuations as the election campaign progresses.

US and China 10-year government bond yield comparison

Conclusion

US elections carry broad implications for global bond markets, influencing inflation expectations, monetary policy, geopolitical risk, and the global trade outlook. The interaction between fiscal policy uncertainty, potential shifts in the Federal Reserve's response to differing fiscal directions, and changes in the global trade environment are poised to introduce volatility in fixed income investments.

For global investors, understanding these complex dynamics is essential, as navigating bond markets during election cycles requires a nuanced approach that accounts for both domestic and international factors.