How to trade for a Republican or Democratic victory
While voters are weighing each party’s economic policies given heightened inflation and a bear market, historical data shows that politics has little effect on long-term stock returns. Nevertheless, the election itself is a newsworthy event which might move markets and provide a trading opportunity.
Looking at Historical Data
Below is an analysis of stock market returns for each US presidential election back to 1928. The returns are calculated from an index price from one day before the election to one day after. In cases where the outcome was not known on the day of the election, we used the date on which news outlets widely reported the result.
|Franklin D. Roosevelt||D||11/8/1932||4.6%|
|Franklin D. Roosevelt||D||11/3/1936||-1.5%|
|Franklin D. Roosevelt||D||11/5/1940||3.4%|
|Franklin D. Roosevelt||D||11/7/1944||0.2%|
|Harry S. Truman||D||11/2/1948||4.8%|
|Dwight D. Eisenhower||R||11/4/1952||-0.3%|
|Dwight D. Eisenhower||R||11/6/1956||1.0%|
|John F. Kennedy||D||11/8/1960||-0.4%|
|Lyndon B. Johnson||D||11/3/1964||0.0%|
|George H. W. Bush||R||11/8/1988||0.2%|
|George W. Bush||R||11/7/2000*||1.6%|
|George W. Bush||R||11/2/2004||-1.1%|
Based on the data, major elections don’t have a major effect on the stock market. Most outcomes are well within the normal range of daily stock market variation. Here are a few possible explanations for this phenomenon:
- The market doesn’t correlate with politics in general
- Investors anticipate the probable political outcomes of elections and “price them in” in advance of elections
- Fiscal policy is immaterial relative to monetary policy (which is independent of politics)
One caveat is that the above analysis only examined an aggregate stock market index. Supposing that different political parties support different economic sectors and industries, individual stocks may be more immediately sensitive to election results. In this case, the winners and losers likely cancel out the effects to the broader market index.
Conclusion: More Random Noise
Based on historical data, the 2022 midterm election shouldn’t have much of an effect on stock market indices. Of course, past performance is never a guarantee of future results, and there may be surprise events that move markets.
Short term traders might prefer to look at other factors such as technical analysis or economic news releases rather than the election. Otherwise, they may find trading opportunities from individual stocks or industries rather than broad market averages. Long term investors, of course, typically look past even one year’s worth of potential events.