Despite the vast differences between Republican presidential hopeful Donald Trump and Democratic nominee Hillary Clinton, the race to the White House is going to be close. But how will the stock market respond to a Trump or Clinton victory after November 8?
Historically, there is a strong correlation with stock market returns and presidential elections, though the results are not always predictable.
How Will 2016 U.S. Presidential Election Affect Stocks?
Over the last 182 years, bear markets, recessions, and wars tend to mark the first two years of a president’s term. The second half of their tenure is followed by bull markets. Since 1833, the Dow Jones Industrial Average has gained 10.4% in the year before a presidential election on average and approximately six percent in the year of the election.1
How does President Obama’s second term shape up? The S&P 500 fell 0.7% in 2015 (the first time the Dow has been down the year before an election since 1939) and so far, the S&P 500 is up 6.2%.
The gains in the first two years of the U.S. election cycle are a little more muted with average gains of 2.5% in the first year and 4.2% in the second. In 2013, the first year of President Obama’s second term, the S&P 500 was up a whopping 29%, in 2014, the index advanced 11.5%. Much of those gains can be attributed to the Federal Reserve’s easy monetary policy and artificial interest rates hovering near zero.
What about 2017? Conventional wisdom would suggest a Trump win would be good for stocks, because they are, supposedly, more business-friendly than the Democrats. But, going back to 1900, investors have done a little better when a Democrat takes the White House, with the Dow Jones advancing almost nine percent annually versus roughly six percent when a Republican wins.
No matter how you look at it, it’s fair to say that the current U.S. presidential election and its impact on stock market gains will be anything but average. And whoever wins the U.S. presidential race will have a big impact on the stock market, taxes, immigration, healthcare, and federal regulations.
How a Trump or Clinton Presidency Could Impact Portfolios
There has already been some nervous volatility in the run up to the November elections, due to concerns about Donald Trump, who is a Washington outsider and whose political leadership is a bit of a wild card.
At the same time, Trump’s business-friendly policies would lead to lower corporate tax rates, which could help boost investments and the stock market. That could face headwinds, though, thanks to his protectionist trade policy views and dislike for agreements like NAFTA. All of which could negatively impact the U.S. economy and equity markets.
Hillary Clinton, on the other hand, will most likely keep the status quo and follow the current Obama administration. Will that be good for stocks in 2017? Clinton is not opposed to increasing corporate taxes and tighter financial regulations—both of which could stunt growth, investment, and stocks.
Donald Trump is not a fan of the U.S. Federal Reserve or Janet Yellen. He has repeatedly said that artificially low interest rates are behind the stock market bubble and are in place to help Obama economic policies. Should Trump win the presidential election, chances are good he’ll push for higher interest rates, which would lead to a stronger U.S. dollar. On the other hand, higher rates could put the bull market in jeopardy.
Hillary Clinton on the other hand would most likely keep interest rates lower. Any future rate hikes would be small and measured. This could lead to the greenback losing strength against other major and even some emerging currencies.
Gold and the U.S. dollar are negatively correlated. For starters, gold is priced in U.S. dollars; if the dollar is strong then gold prices will fall. As a hedge against economic uncertainty, a strong dollar also points to a strong U.S. economy, higher interest rates, and lower gold prices.
High gold prices suggest the U.S. economy is not doing as well, and interest rates will remain low.
A Trump presidency has the potential for higher interest rates and a stronger U.S. dollar, which would put pressure on gold prices. A Clinton administration would foster a longer low-interest rate horizon, which would be bullish for gold prices.
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Whether it’s the lead up to a residential debate or U.S. presidential election, or the following months after the election, equities will continue to ebb and flow. The key to profiting from the U.S. election is being able to understand how each candidate will impact equities and how to read the markets. With the right tools, investors can make money whether we’re left with a Trump or Clinton presidency.
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- “Stock Trader’s Almanac 2016 Market Update,” Market Technicians Association, last accessed September 29, 2016; https://www.mta.org/wp-content/uploads/2016/02/0210-hirsch.pdf.