Stock market and presidential elections - trends and strategies
Big events can often cause big moves in the financial markets. One of the world's biggest events is the US presidential election which takes place every four years. The relationship between the stock market and presidential elections can often lead to an increase in volatility which may provide unique trading and investing opportunities for those who are prepared. Some research even suggests that stocks can predict who will win the election! (Something you'll learn more about in this article).
But when managing a portfolio in preparation for such big events, should investors be too concerned about the relationship between the stock market and presidential elections? Are there really patterns in stock market trends after presidential elections take place? What typically happens to the stock market before and after elections and what are the best type of strategies to take advantage of any moves? Read on to find out!
Understanding the four-year election cycle
To understand the relationship between the stock market and presidential elections it is important to first understand the four-year election cycle phenomenon. The tendency of the stock market to move in a particular direction during each one of the years leading to the election can be a great edge when choosing a trading or investing strategy (a topic, along with examples, that is covered in more detail further in this article).
According to many different analysts, such as Yale Hirsch - a leading stock market historian, there is a relationship between the stock market and different election years. In the big picture, analysis from investment bank Fidelity shows that the first two years of an election cycle (post-election and mid-term) tend to be the weakest performing relative to the last two years. As the last two years (pre-election and the election) have a stronger focus on re-election campaigns and promises, history suggests that there is a tendency to provide higher returns.
Now let's dig a little deeper into what happens to the stock market before, during and after the US presidential election by first looking at a very interesting topic - can the stock market predict the next president?
Can the stock market predict who will win the election?
With a title like the one above it is important to state from the outset that past performance does not guarantee future performance and that markets will go up and down. However, history can sometimes leave patterns behind that may repeat themselves in the future. According to LPL Financial Chief Market Strategist Ryan Detrick, if stocks have gained in the three months prior to the election, there is a tendency for the incumbent party to win. The opposite holds true if stocks are lower.
Source: LPL Research
As the table shows above, the tendencies do not hold true all the time and the one thing about patterns is that they are made to be broken! However, history does suggest that the positioning in the stock market may have a bearing on predicting who could win the election. The uncertainty of a new political party can often cause investors to be cautious until they know more about their policies. If the markets feels more comfortable that the incumbent party is likely to win then they make stick to their previous investment strategies as they know what the next four years could look like.
But what happens at the end of an election year? Let's find out!
Stock market trends after presidential elections
We already know from the previous section that the last two years of the four-year election cycle (pre-election and the election year), tend to be better than the first two years. History also suggests that the stock market tends to end the year much better if the incumbent president wins relative to when a new president is elected. One thing that all these statistics show is the market really does hate uncertainty!
Source: BlackRock via Forbes
In the research above of the S&P 500 stock market index, there is a tendency for the stock market to rise during a presidential election year with greater returns more likely if the incumbent president wins.
However, it is important to note that not every presidential election year is positive. In the chart below, it shows the S&P 500 stock market index's performance for the US presidential election years from 1964 to 2016.
Source: Cazenove Capital
The two negative election years landed at the same time as the 2000 tech bubble crash and the 2008 financial recession. However, other election years tended to be positive. While this pattern may not repeat itself in the future some analysts believe this is due to the fact investors get excited about election campaign promises, as well as the historical tendency for the US Federal Reserve to ease policy in the third year of the election cycle. Of course, to try and capitalise on such moves having the right trading tools is extremely important.
Did you know that you can download the MetaTrader 5 trading platform provided by Admiral Markets completely FREE? With this platform, you can view live and historical price charts for multiple asset classes and financial instruments including the S&P 500 stock market index!
Not only can you access advanced trading features, but you can also trade directly from the chart and access other expert tools. Download your FREE MetaTrader 5 trading platform today by clicking the banner below:
Once you have downloaded your free trading platform you can start to view live price charts of different asset classes and financial instruments. For example, below is a chart of the S&P 500 stock market index with the blue vertical lines indicating the approximate month of the US presidential election in that year.
Source: Admiral Markets MetaTrader 5, SP500, Monthly - Data rage: from 1 May 2005 to 25 September 2020, accessed on 25 September 2020 at 8:45 am BST. - Please note: Past performance is not a reliable indicator of future results.
Did you know that you can actually trade the S&P 500 stock market index via Contracts for Difference (CFDs) directly from the MetaTrader 5 trading platform provided by Admiral Markets? CFDs allow traders to go long and short and potentially profit from both rising and falling markets!
The next section shows you how to open an order ticket to set your trading variables which is useful to know before we go through the different types of trading and investing strategies used in the stock market before, during and after US presidential elections.
How to trade stock market indices
After you have downloaded your MetaTrader 5 trading platform provided by Admiral Markets simply open the application and follow through on the next steps to find the S&P 500 Index CFD instrument (which we will use in this example) and open a trading ticket.
- Open your MetaTrader 5 trading platform.
- Select Market Watch from the View tab on the top menu.
- When this column opens on the left side you have a few options. If you know the symbol you want to trade on then simply type it in at the bottom where it says 'click to add.' Alternatively, you can right-click and select Symbols to view the thousands of symbols available to trade on across a variety of different asset classes.
- Once the symbol is in the Market Watch window, simply drag it onto the chart on the right side.
- To open a trading ticket there are different options available:
- Press F9 on your keyboard.
- Select New Order from the menu above.
- Right-click, select Trading and then New Order.
- There are also one-click trading options available for advanced traders.
- Input your order type, volume, stop loss, take profit, etc.
A screenshot of a trading ticket on the SP500 Index CFD from the MetaTrader 5 trading platform provided by Admiral Markets.
You can learn more about how to trade on MetaTrader 4 and MetaTrader 5 in the following video. You will also see how to use a Trading Calculator so you can risk manage trades properly. Just click on the video below to start watching:
Stock market trading and investing strategies
Knowing some of the tendencies of how the stock market moves during certain election years and its outcomes can be very powerful for both traders and investors. However, it is also important to remember that the market will always move up and down regardless of what big news event is happening.
Therefore, having a deep arsenal of trading and investing strategies to cover different market scenarios whether before, during or after the US presidential election is important. The hallmark of any type of strategy should not just be what to do with the information listed above but also risk management. Below are just a few ideas that merely serve as a starting point for traders and investors to build upon and test. You can find more ideas in the ' Stock Market Response to Presidential Elections' article.
1. Focus on long-term fundamentals and use volatility to 'buy the dip'
It can pay off to take a step back and look at the bigger picture fundamentals and how that will affect the overall stock market. Investors are used to political winds changing so may dig deeper into the fundamentals of what is happening in the big picture which could be the economy, earnings and so on.
For example, in the run-up to the 2020 US Presidential election, the race between Trump vs Biden was fraught with uncertainty at the beginning of the year. However, due to the coronavirus pandemic, the US Federal Reserve acted by deploying a huge stimulus plan that was designed to stabilise and encourage growth. Subsequently, the US stock market rallied higher after the panic.
Many investors would have used the 'election uncertainty' to merely 'buy the dip' in a larger bull market trend. However, during this situation investors filtered out opportunities further by investigating different sectors as some performed better than others during the pandemic. It was Warren Buffett who famously coined the phrase: '"Buy when others are fearful and sell when others are greedy."
2. Invest into what matters most to each US presidential candidate
In some situations, the two presidential candidates may have very different views of the world, economy and what to focus on when in office. This can sometimes lead to unique opportunities if identifiable.
For example, in the 2020 US presidential election, candidate Joe Biden had a strong focus on green energy and health care during campaigning. Investors could have looked for potential opportunities in the renewable energy and health care sectors. Incumbent President Donald Trump had a strong focus on reviving fossil-fuel energy companies, as well as having strong anti-China rhetoric.
Of course, in this situation, there will also be stocks that will largely be unaffected no matter which political party wins. Your everyday companies such as Microsoft, Apple, Wal-Mart, etc may well just keep moving in the same direction based on the underlying fundamentals of how the company is doing at that particular time.
Fortunately, with Admiral Markets you can trade on thousands of different stock CFDs from all around the world. Click on the banner below to open an account today to start trading CFDs on the world's top blue-chip companies.
3. Use technical analysis to find short-term volatility turning points
There are many different styles of trading and investing. Some market participants are very short-term and some are very long-term and some are in the middle of the two. It is very important to identify your trading style as consistency plays a huge role in being successful in the markets.
While longer-term investors will analyse fundamental data and perform sector analysis, shorter-term traders may have a stronger focus towards technical analysis to identify shorter-term moves in the market. As the financial market is full of trading algorithms taking trades in nanoseconds, there can often be turning points throughout the day that are signalled through technical trading indicators which are commonly used by algorithms.
Therefore, during higher volatility periods in the market traders may try to capitalise on such moves. Of course, it is easier said than done - especially for beginner traders. One important element is preparation. A tool that can help traders prepare to navigate such volatile market conditions is the Technical Insight Lookup indicator from Trading Central which is provided to Admiral Markets clients when upgrading to the MetaTrader Supreme Edition platform, as shown below:
A screenshot of the Technical Insight Lookup indicator in the MetaTrader Supreme Edition upgrade.
In the above image, the Technical Insight Lookup indicator is showing all the active technical analysis events for the S&P 500 Index as typed into the search box at the top. Traders can view short-term (2-6 weeks), intermediate-term (6-9 weeks) and long-term (more than nine months) technical analysis signals for bullish and bearish trades. This can actually be done on thousands of different financial instruments covering stocks, indices, commodities, ETFs and more.
Traders may then also combine such events with the tendency of the stock market to move in one direction or the other during one of the election years. This can be a great way for beginner traders to start filtering out trading ideas from the big picture down to the technical picture. The combination of different styles (technical and fundamental) can be very powerful.
Did you know that you can upgrade your MetaTrader trading platform to the Admiral Markets Supreme Edition and access the Technical Insight Lookup indicator completely FREE? Not only that but you can also access a range of other advanced indicators and services that can supercharge your trading capabilities!
Start your FREE download today by clicking on the banner below:
Why trade the stock market and presidential elections with Admiral Markets?
- You can trade and invest with a well-established, reputable company that is authorised and regulated by the Financial Conduct Authority (FCA).
- You can trade and invest directly from the world's most popular trading platform MetaTrader for PC, Mac, Web, Android and iOS operating systems.
- You can upgrade and supercharge your trading platform completely FREE to the Supreme Edition for actionable trading ideas on thousands of different stocks and ETFs.
- Open a Trade.MT4 or Trade.MT5 trading account to trade via CFDs (Contracts for Difference) which will allow you to go long and short on an instrument to potentially profit from both rising and falling markets.
One of the best ways to get started is to use a FREE demo trading account provided by Admiral Markets. This way you can not only test the services and products but you can also test your trading ideas and theories in a virtual environment until you are ready to go live!
Click on the banner below to get started today!
About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.