The Impact of the US Electoral Market: What Does History Show?

VaselineSeptember 2, 2024

0 4 minutes read

The Impact of the US Electoral Market: What Does History Show?

Economy

The relationship between the party affiliations of US presidents and economic growth has been a subject of extensive research and debate. Historically, some studies have suggested a correlation between the party in power and economic performance. For example, post-World War II data often show that the US economy grew faster under Democratic than Republican presidents. However, this correlation does not necessarily imply causation.

Octa analyst Kar Yong Ang said: “Economic growth is a function of many variables, including global economic conditions, technological advances, fiscal and monetary policies and unforeseen events such as natural disasters or pandemics. Therefore, attributing economic performance solely to the party affiliation of the president may be overly simplistic and potentially misleading”.

Indeed, the legislative branch also plays a crucial role in shaping economic policy. A president’s ability to implement his economic agenda often depends on the makeup of Congress. For example, a president facing a divided government may have difficulty enacting meaningful economic reforms regardless of party affiliation.

However, there is a widespread belief that Democratic administrations tend to focus more on fiscal stimulus and welfare programs, which can boost consumer spending and economic growth in the short term. On the other hand, Republican administrations often emphasize tax cuts and deregulation, which can spur business investment and long-term economic growth.

Key US macro indicators under four presidents (2004–2024)

Source: Octa

At the same time, both bad and good events happen, regardless of who is in the White House. “Honestly, sometimes it’s just luck that defines the history of presidents in the economy. For example, Obama entered the White House when the US economy was about to begin to recover from the Great Financial Crisis of 2007-2008, while Trump is arguably less fortunate as he faced the crisis without prior to Covid in his last year. presidency’says Kar Yong Ang, Octa’s analyst. Overall, judging by historical macro indicators, there is no clear conclusion to be drawn about which president is better for the economy.

US actions

US stocks tend to experience increased volatility in the months leading up to elections. This is largely due to uncertainty about potential policy changes that could affect international trade, economic growth and geopolitical stability. Therefore, market participants often engage in “wait and see” behavior, holding off on major investment decisions until the outcome of the election is clear. Historically, the stock market tends to perform better in the year following an election, especially if the incumbent party wins, as this suggests policy continuity.

While elections can certainly spark immediate reactions, historical data shows that their long-term impact on financial markets tends to be limited. Market performance in the medium to long term is more often influenced by broader economic parameters such as inflation trends than by who wins the election.

Performance of the Dow Jones Industrial Average (DJIA) under four presidents (2004-2024)

Source: Octa

Historically, sectors such as healthcare, energy, technology and finance react differently to election results due to their sensitivity to legislative changes. The 2016 US election serves as a notable example of markets reacting strongly to election results, anticipating tax cuts and regulatory reforms that boosted market sentiment.

US dollar

Both domestic and international perceptions of candidates’ economic policies influence the performance of the US dollar in election years. A candidate perceived as fiscally conservative could strengthen the dollar on expectations of reduced government spending and lower inflation. Conversely, a candidate who favors expansionary fiscal policies could lead to a weakening of the dollar due to concerns about rising debt.

Trade policies are another crucial factor. A candidate with a protectionist stance could introduce tariffs or renegotiate trade agreements, which can affect the value of the dollar. Protectionist policies may lead to a stronger dollar in the short term due to reduced imports, but could also lead to retaliatory measures from trading partners that could weaken the dollar in the long term.

Geopolitical stability and foreign relations are additional issues that can affect the dollar during election periods. A candidate perceived as more stable and predictable on foreign policy could boost investor confidence, leading to a stronger dollar. On the other hand, a candidate whose policies are seen as potentially destabilizing could lead to a weaker dollar as investors seek alternative assets.

Performance of the US Dollar Index (DXY) under four Presidents (2004–2024)

Source: Octa

Over the past 20 years, the US dollar index (DXY) has outperformed under Democratic presidents and underperformed under Republican leadership. However, as with US stock indices, it is critical not to oversimplify this trend. The US dollar is a global reserve currency influenced by a multitude of factors beyond presidential policies.

Gold

Gold, considered a safe-haven asset, typically sees increased demand during uncertain election periods. Historical data indicates that, on a micro level, gold prices tend to rise in the months leading up to elections and may continue to rise if election results are contested or lead to significant policy changes.

However, Kar Yong Ang, an Octa analyst, notes: “If we look at the big picture, we see that the price of gold generally tends to rise over the long term, and the ideological position of a sitting US president has little or no impact on its performance.” Indeed, the value of gold nearly doubled during President Obama’s first term, but experienced a 30% decline during his second term.

Performance of the US Dollar Index (DXY) under Four Residents (2004–2024)

Source: Octa

According to a study by the World Gold Council (WGC), gold typically performs slightly better in the six months leading up to the election of a Republican president and remains flat thereafter. On the other hand, it tends to underperform before the election of a Democratic president and performs just below the long-term average in the six-month post-election period.^⁽¹⁾ However, the WGC admits that these results are statistically insignificant and that gold responds not to the party affiliation of a President-elect, but more likely to the expected effect of specific policies.