The story said the market would be volatile, which would lead to the presidential election. The story was correct. The Dow Jones Industrial Average ended its second-best election day of all time on Tuesday with a gain of over 500 points. However, it did so after some major losses the previous week.
When election day is in the rear-view mirror, what does the history of stocks and elections tell about the S&P 500 for the rest of 2020? With so much still unknown how this election will end, here are possible outcomes for the stock market based on the history of the election.
A competitive choice can be a factor that adds even more volatility, but there's only the Bush-Gore battle of 2000 in recent history, so not too much data to fall back on. While this created problems for the S&P 500, the longer history of the markets in the election years, going back eight decades to 1944, suggests stocks could do well in the final two months of 2020 regardless of the winner .
It's the day after election day and the outcome of the race between President Donald Trump and Democratic candidate Joe Biden is far from being decided. Trump has won big states like Florida, Texas, and Ohio, according to NBC News predictions, but Arizona, Wisconsin, Nevada, Michigan, Pennsylvania, Georgia, and North Carolina are either too early or too close to be called. On Wednesday morning, Trump threatened legal action to stop counting days after the election.
Stock futures were higher in trading even though the futures had moved between gains and losses overnight. According to history, if you had to pick a month in the future to take higher risk on stocks, it would be better to bet on December in an election year.
In the November election year since 1944, the S&P 500 rose an average of 0.8%, according to CFRA and S & P Dow Jones indices. That's not great – it's actually considerably lower (by 600 basis points) than the November average since 1944. And the stock market rose less than half (42%) in November of the election year – or in other words, the frequency of the gains was lower – compared to 66% of all November increases over the past eight decades.
A trader the morning after the 2016 presidential election. US stocks started in the red on November 4, 2016, but ended higher that day. The history of the election years suggests that more profits could be made before 2020.
Xinhua | Wang Ying via Getty Images | Xinhua News Agency
In December, the election year numbers for stocks look better. It's been a good month for stocks historically, regardless of the election cycle. The S&P 500 saw an average increase of 1.5% through 1944. In the election years in particular, this monthly gain remains strong at 1.4%, albeit a little lower. However, the S&P 500 is more likely to gain in the final month of the election years, even if the size of the profit is slightly lower. The US stock market grew 84% of the time in December of the election year since 1944, up from 74% for all of December. CFRA suggests ending election uncertainty was a factor as well as seasonal optimism from investors.
The victorious party is another factor in short-term market movements after the elections.
The Democratic Party's presidential election victories were followed by weaker November. But the S&P 500 saw above-average price gains and more frequent wins in December after a Democratic presidential candidate won.
It is rather the opposite when the Republican Party wins. The S&P 500 saw better gains as well as more frequent gains in November of these election years. In December, however, earnings were below historical averages after a Republican won the election.
The realignment of the political power structure in Washington, DC has also affected stocks in the expected fashion and beyond the last two months of an election year. Given the federal government's pandemic incentives, which are important to the economy and the marketplace, the way Washington, DC looks after the vote will also play a role.
History shows that the level of control exercised by the two major political parties over the branches of federal government influenced the level of profits in the year following the presidential election.
CFRA / S & P Dow Jones indices
The best post-election profits came when the President and Congress were under the control of the same party. The S&P 500 increased an average of 10.6% over those 30 years, compared to an average of 8.8% for all 76 years of CFRA. His conclusion: when a president has a congress that "stamps" his agenda, stocks benefit.
It also follows that a distribution of power between Congress and the executive on stocks was the second best (8.6%), and that a Congress that unified control over the president's party achieved the worst results on average (7th , 4%).
The years after an election in which the same party took control of the executive and legislative branches of government were the only ones where the S&P 500's average return (10.6%) outperformed the average equity gains across all 76 years (8.8%)).