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How Will the Market Respond to the Presidential Election?

What will happen on Wall Street after November 8? Trying to predict which way the market will go is difficult, even when it comes to a single trading session. Investors may take some cues from the result of the presidential election and push stocks in one direction or another.

Could there be a market shock? The biggest stock market disruptor so far in 2016 has been the Brexit vote in the United Kingdom. That late June development erased the entire year-to-date advance of the S&P 500, but the S&P recovered quickly, gaining back its losses by early July in a textbook example of stock market resilience. The index rallied for several weeks thereafter.

Now, with November 8th nearing, we shift our focus to the presidential election. The market appears to be pricing in a Clinton win. A Trump win would defy quite a few political forecasts and perhaps, affect Wall Street in a way similar to the Brexit vote.

One forecasting firm, Macroeconomic Advisers, has put out a bold prediction: it believes that the S&P 500 could rise 4% in the near term after a Clinton win, while a Trump win would bring on a 7-8% descent. The Brookings Institution, a research and public policy think tank, feels a Trump victory would prompt a correction.

Regardless of who wins, some immediate volatility would not be unexpected. Bespoke Investment Group, a respected market data provider, finds that the S&P 500 has seesawed in the days surrounding recent presidential elections. The common pattern is a rally on Election Day; then, a pullback the next day, averaging around 1%. An extreme example of this behavior came in 2008, when the index rose 4% on Election Day, then fell 5.3% a day later, but that was during the height of the 2008 financial crisis.

What does history tell us could happen in the months ahead? Understanding that past performance is not indicative of future success or failure, we see that the performance of the S&P has varied widely on such occasions. Following the 2012 election, the index was flat for the remainder of the year; the next year, the S&P rose 30%. In 2008, the S&P fell 10% by the end of the year. Then, it advanced 23% in 2009. In 2004, a 7% rally after George W. Bush’s re-election was followed by a 3% gain in 2005. In 2000, an 8% post-election retreat for the S&P preceded a 13% fall for the index in 2001. The data shows that stock market behavior following a presidential election, or at any time, is hard to predict.   

The presidential election is an event with a timeline. Wall Street’s reaction to it, positive or negative, will likely be old news within weeks, if not days. The Federal Reserve’s December policy statement may make bigger waves. As we know, short term the financial markets are unpredictable. One market moment should not lead you to rethink your approach or your commitment to saving and investing for your long-term goals.

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