How Can Stock Markets Impact US Presidential Elections?
Introduction
When it comes to US presidential elections, numerous factors come into play to determine the outcome. These can include the state of the economy, the backgrounds of the voters, voter turnout, and the results in swing states, among others. However, a factor that often garners significant attention is the performance of the stock market.
This report aims to analyze the performance of two key stock indices, namely the Dow Jones and the S&P 500, in the lead-up to the 22 presidential elections since 1932. By examining the average returns of these indices one year and three months prior to elections, we can gain insights into how stock market performance may influence the electoral process. Additionally, we will explore whether voters respond accordingly to stock performance as an election draws near.
Background
Before delving into the specific analysis, it is important to understand how the performance of stocks can impact elections in the first place. The price of a stock represents partial ownership in a corporation and is influenced by supply and demand forces that reflect the expected fortunes of the underlying company. Some stocks offer dividends and voting rights in shareholder meetings, but the primary benefit lies in the ability to sell the stock at a higher price in the future.
When the price of a stock rises, investors can profit by selling at a higher value than their initial investment. If investors believe that a business will generate higher returns in the future, driving demand for its shares, the price will often increase. There are specific and systematic forces that determine the direction of a stock. In this analysis, we focus on the latter, specifically how the overall state of the US economy influences the stock market.
The S&P 500 and Dow Jones are two prominent stock indices that weigh various sectors of the economy differently, such as information technology, real estate, and energy. A positive performance of these indices leading up to an election suggests that investors anticipate higher future profits for the businesses in these sectors. This positive outlook could be driven by expectations of robust economic growth, potentially increasing the likelihood of the incumbent party retaining power.
Conversely, if the returns in the stock market are negative before an election, it might indicate a pessimistic economic outlook. In such cases, the party running for re-election could face a higher risk of losing power. However, it is important to note that this assumption relies on the assumption that voters generally value stock market performance. It is one of the limitations of this study, which we will discuss in more detail later.
S&P 500, Dow Jones Returns 1 Year Before Presidential Election
In the analysis of the 22 elections since 1932, we found that there were 18 instances where the returns in the S&P 500 and Dow Jones one year before a presidential election were, on average, positive. Out of these 18 occurrences, the incumbent party won 11 times, translating to a success rate of approximately 61.11%. On the other hand, there were four instances where returns in the stock market were negative, and in three of those cases, the incumbent party lost, reflecting a failure rate of about 75%. For more details, please refer to the table below:
- S&P 500 and Dow Jones Returns 1 Year Before Presidential Election
| Election Year | Stock Returns | Incumbent Party Outcome |
|---|---|---|
| 1932 | Positive | Lost |
| 1936 | Positive | Won |
| … | … | … |
S&P 500, Dow Jones Returns 3 Months Before Presidential Election
Now, let us consider the impact of stock market returns three months before a presidential election. From the analysis of the same 22 elections, we found that in thirteen instances, the returns in the S&P 500 and Dow Jones were positive. Out of these thirteen occurrences, the incumbent party won in eleven cases, resulting in a success rate of approximately 84.62%. On the other hand, there were eight instances where the stock returns were negative, and in seven of those cases, the incumbent party lost, reflecting a failure rate of about 88.89%.
Conclusion
Based on the analysis conducted, it appears that the three-month data provides more consistent outcomes compared to the one-year data. In most cases, the performance of the stock market closer to an election correlates with the success or failure of the incumbent party. However, it is crucial to note that correlation does not imply causation.
One possible explanation for these findings is that voters place a greater emphasis on stock market performance in the three months leading up to an election. As they pay closer attention to current events and prepare to cast their ballots, the impact of the stock market may become more pronounced in their decision-making process.
Nevertheless, it is essential to acknowledge the limitations of this study. Firstly, the sample size is relatively small, consisting of only 22 elections. A larger sample size would likely increase the accuracy of the results. Secondly, the study does not consider the extent to which voters value stock returns around elections. Lastly, the analysis does not explore the relationship between the magnitude of gains or losses in stocks and the likelihood of an incumbent party winning or losing.
In conclusion, while the performance of the stock market seems to be a factor worth considering in US presidential elections, it is just one piece of a complex puzzle. Voters’ decisions are influenced by a multitude of factors, and it is crucial to take a holistic approach when analyzing election outcomes.
Disclaimer: This article was written by Daniel Dubrovsky, a Currency Analyst for DailyFX.com. For further insights or to contact Daniel, kindly use the comments section below or reach out on Twitter at @ddubrovskyFX.