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How Does the Stock Market React to Presidential Elections?

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Kai Ryssdal tells Marketplace listeners nearly every day that the stock market isn't the economy, and that's true. However, the news does impact the market's performance. The presidential election is one of the biggest influencers within the U.S. Historically, the stock market has reacted to elections in specific ways and it will likely continue the trend.

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How does the stock market react to elections?

In the past, the election season has meant volatility for the stock market. This is true in the months leading up to a presidential election, during the election itself, and the months following the election.

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As for the period after an election, a new term from a new president means uncertainty and the market doesn't like uncertainty. The stock market does better when an incumbent starts a second term compared to when a new president clocks in. The actual rate of change depends on the specific president's policy preferences, particularly in the realm of taxes, healthcare, and business regulations.

It's a two-way street, too. Research from Dan Clifton, the head of policy research at Strategas, says that the stock market performance before an election has the potential to determine the election's outcome. Clifton's research is simple:

  • For all elections since 1984, positive returns for the last three months of the S&P 500 mean an incumbent win.
  • Losses during this period mean an incumbent loss.

Whether or not this will ring true for 2020 remains to be seen.

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How did the market react to the 2016 election?

Before the results came in, stock market analysts predicted that a Trump victory in the 2016 election would make the stock market plummet and ultimately lead to an economic recession. While the S&P 500 did fall a staggering five percent in pre-market trading on election night, it recovered quickly and so did the rest of the market. According to Forbes, 2017–2019 reaped an average annual return of 14 percent for the S&P 500 index. 

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However, the 2020 presidential election could be different. The U.S. is currently operating in a recessed state due to the global COVID-19 pandemic and other factors. In the last 100 years, almost every president who encountered a recession in the two years leading up to the election wasn't reelected. The only president who broke the trend was Calvin Coolidge in the 1920s.

In reality, issues surrounding the coronavirus pandemic could turn all of the predictions on their head.

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Stock market futures and the election

Based on the markets' performance, Wall Street claims a Biden win for the 2020 presidential election. The last week of October saw the most volatility since March when the COVID-19 pandemic bludgeoned the market. However, the numbers are up in the morning on Monday, Nov. 2.

With the election one day away, it's hard to separate it from monumental COVID-19 infection rates, which are the highest they have ever been in the U.S. Equity futures are up for the nation, but we will have yet to see how long that lasts, who wins the election, and what the stock market will do for the months to come. 

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