US Elections – Impact of Presidential Change on Equity Markets

Published on 16 Sep, 2020

With the US Elections slated to be held on November 3, 2020, curiosity about who would be the next American President is growing. Amid global tensions due to the COVID-19 pandemic and other geopolitical issues, citizens are hoping for a strong leadership. For Donald Trump, the current Republican President, the challenge to retain power has increased as voters’ attention has now shifted from concerns such as social equality to managing the huge number of COVID-19 cases and stimulating the economy, which has been severely hit by the pandemic. Can a leadership change from Donald Trump to Joe Biden positively impact equity markets?

The US Presidential Elections are critical not only for the country’s citizens but also for the financial markets and business community worldwide. Historical evidence reveals that as the election month approaches, stock markets usually witness increased volatility, depicting that the uncertainty around the change in leadership affects investor sentiments. According to polls in battleground states, prospects for Joe Biden, Trump’s challenger from the Democratic Party, have improved, particularly due to the COVID-19 crisis. This could be due to people’s perception that he might have managed the situation in a better way. However, we must bear in mind that polls are to be read with some skepticism, as they may not be a true indicator of the real situation. In the coming weeks, the debate around whether the baton will be passed on to Biden or would Trump be successful in retaining his position would remain rife.

How US elections influence domestic equities?

Avg S&P 500 Price Performance: Presidential Election Results (1936-2017)

Source: Strategas Research Partners

As per a study by Strategas Research Partners, the performance of the S&P 500 index in the three months prior to elections has been successful in predicting 87% of elections since 1928 and 100% since 1984. Whenever returns have been positive, the incumbent party has won. If the index has suffered losses in these three months, the incumbent party has lost. On a forward-looking note, S&P 500 tends to perform better in the year after elections if the incumbent party wins. The average S&P 500 return during the post-election years (1936–2017) has been around 5.8% on the victory of the incumbent and approximately 2.3% on their defeat. This simply reiterates the fact that presidential change triggers “fear of the unknown,” and markets may perceive such change in a negative light.

In the event of a change in administration and Biden assuming office, focus would be on launching new programs for clean energy, building on the Affordable Care Act (or Obamacare), and addressing the racial wealth gap. The Biden administration will likely increase taxes as well as increase regulatory scrutiny for financial and energy stocks. On the other hand, the utilities, managed healthcare, and renewable energy sectors are expected to benefit. The impact may be neutral for communications services, consumer staples, and real estate investment trusts.

How American politics influences Asian equities?

Years of US Presidential Election Cycle and MSCI Asia Ex Japan Performance

Source: Bloomberg
*Returns are calculated for the period between 1988 and 2019.
**Returns do not include dividends.
***If the election year under consideration is 2016, pre-election, post-election, and midterm years would be 2015, 2017, and 2018, respectively.

Global investor sentiments are considerably influenced by American politics. Since the 1987 US Presidential elections, MSCI AC Asia ex Japan’s average returns during election years have been weaker than those after the election. Although the index’s performance in the post-election years has been mixed, it has gained around 26% on average. Hence, we can see that Asia is a high-beta market and faces more upheaval than the US market itself.

A change in American leadership can uplift investor sentiments, which have been low due to Trump’s unconventional approach toward foreign relations. In contrast, Biden’s approach is believed to be subtle and coordinated. Glen S. Fukushima, a former member of Hillary Clinton’s Asia Working Group and a veteran observer of US-Asia relations, believes that Biden will maintain a collaborative relationship with US allies in Asia rather than adopt Trump’s confrontational approach. Biden’s approach will treat China strategically as a rival and competitor and not as an enemy.

If Biden reverses previous tax cuts made by Trump, beneficiaries such as Japanese auto manufacturers may experience short-term pressure. However, Biden’s pro-climate agenda would be favorable for ecofriendly car manufacturers as well as battery and equipment providers in Asia. Overall, lesser geopolitical risks may act as catalysts for Asia’s stock markets over the long term. Additionally, since Biden is in favor of increased corporate taxes, his victory could result in a slowing US stock market. This can boost Asian markets as investors would explore alternative markets.

Overall, investors must remain cautious of the heightened market volatility stemming from unpredictable elections in the coming weeks. If Biden succeeds in becoming the President, stocks favoring themes supported by the Democratic Party, such as clean energy and managed healthcare, will likely benefit and can be considered prospective investments. However, we must bear in mind that the performance of markets is not entirely dependent on election results; it also depends on various other economic factors prevailing at that time. One can take examples of elections years such as 2000 and 2008; while 2000 was affected by the Dot-com bubble burst, 2008 was affected by the global financial crisis. Therefore, although tracking the elections is important, investors must also focus on other variables such as market conditions, industry dynamics and company fundamentals.