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Can past market movements predict the outcome of the US election?

Can past market movements predict the outcome of the US election?

A hotly contested primary season has come to a close, leaving Donald Trump and Hillary Clinton left standing as their parties’ presumptive nominees. With the party conventions out of the way the party tickets confirmed, and the main Presidential campaign now underway it’s a good time to review how markets have responded to the election process so far this year and look ahead to the summer and autumn months. Looking back to presidential elections since 1960 two patterns stand out that could influence trading this year. 1) In presidential election years with no incumbent the Dow Jones Industrial Average has declined 0.05% per month on average underperforming the 0.78% monthly average returns in years with an incumbent. This suggests uncertainty over who the incoming president may be and what policies they may change or introduce can weigh on markets. 2) Presidential election years where the party in power was defeated had an average monthly return of (0.13%) underperforming the 0.85% average monthly return when the party in power was re-elected. This suggests that soft markets may reflect discontent with the direction of the country and a mood for change that may show up at the ballot box. 2016 Market Performance to date compared with recent election years 2016 got off to a really rocky start in January, which was a bit worse than similar non-incumbent years like 2000 and 2008. Unlike those years which continued to crumble as stocks entered major bear markets, this year, stocks rebounded in late February and March The Dow has held steady through the spring avoiding the usual seasonal correction similar to 1996 but that year there was a significant July correction. Historical action in the months leading up to a Presidential election suggest that we could see sizeable swings in both directions between now and November. Monthly returns during Recent Presidential Election years Source: CMC Markets What does 2016 market action suggest for the Presidential race? The rocky first six weeks of this year favoured Donald Trump and the Republicans suggesting discontent with the current government but since the middle of February, market expectations have been tipping toward the Democrats. The last line of the table above shows that in the last six elections, the Dow fell 6.3% on average in the first half of years where the party in power changed hands, and rose 5.2% on average in years when the incumbent party held power. This year, the Dow rose 3.25% in the first half, suggesting traders are encouraged about the US economy’s prospects and are not necessarily in a hurry to kick the Democrats out. Market action also favours the Clintons personally. The 3.25% first half return is most similar to 1992 when Bill Clinton was first elected President, while second quarter monthly action this year is most similar to 1996 when Bill Clinton won re-election. The 2.8% July return in the markets was the strongest return for that month since 1992 when Bill Clinton was first elected. While one may think that this market action which coincided with Hillary Clinton’s post-convention bounce in the polls could be a sign traders are expecting the Democrats to retain power and stay the course, history suggests otherwise, July’s rally could actually be an ominous sign given that the two other years with the strongest July market gains were 1980 and 1992 years which saw the party in power change hands. A lot can happen between now and November, politically, economically and in the markets. The recent Brexit referendum in the UK is a reminder that the market is not a perfect predictor of politics, particularly if the race is close. The next big scheduled campaign event is the first head to head debate between the two candidates slated for September 26th followed by the Vice Presidential candidate debate on October 4th.

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