Market impact of the presidential election cycle

Political uncertainty in Europe has already had a serious effect on market sentiment this year. In November, it will be the turn of the United States to move into the spotlight with the presidential elections, which could have a significant impact on the economy and the financial markets.

The race for the White House that has been going on for some time has already delivered quite a few surprises. Unlike the election in 2012, when President Barack Obama was campaigning for re-election, there are two new candidates this time: the controversial real estate magnate Donald Trump and the former first lady Hillary Clinton. The outcome of the election is of course still uncertain and market volatility could increase as a result of the opinion polls. Investors certainly think that the US presidential elections could significantly affect their market prospects (more than 70% of the respondents to a Morgan Stanley survey thought that the election would meaningfully impact their market over the next two years). The result could indeed affect economic policy, and therefore economic growth.

It’s the economy, stupid

The US presidential elections in 2016 involve factors including the degree of ethnic diversity, the complex electoral college and immigration policy, but above all, as always, they will be about economic growth. Since the birth of the Keynesian economic theory, which argues for specific macro-economic policy measures to improve the economic cycle, Washington has played an important role in influencing the evolution of the economy.

It was not long before politicians discovered the relationship between the electorate’s mind and the economic situation. The US Federal Reserve has an important role here, as it is responsible for monetary policy. The measures taken by the Fed can strongly affect economic sentiment, whether this is to the benefit of the political leaders in office or not. For instance, in 1992 George H. Bush (Senior) held the Fed responsible for the election victory of Bill Clinton. In vain, Bush had called for a rate cut in the run-up to the election in order to reverse a difficult situation.

Uncertainty due to no sitting president on the ballot paper

So far, investors appear to be unconcerned about the US presidential elections on 8 November. The US S&P 500 Index is at a historical high on the back of good economic figures and a reduced chance of a Fed rate hike after the Brexit vote. Nevertheless, the election race looks as though it will be exciting. Elections with no sitting president as a candidate have always caused uncertainty. In the years since 1944 in which there was no sitting president on the ballot paper, the S&P 500 gave up more than 3% on average (the average decline in 1952, 1960, 1968, 1988, 2000 and 2008). In other years, the US stock index rose on average by more than 11 %.



What is more unusual this time is the difference between the policy proposals of the two candidates. Both are protectionist and want to amend the free trade treaties, but Trump wants to withdraw the US from the NAFTA trade agreement with Mexico and Canada and limit immigration, among other things. He also wants to replace Fed Chair Janet Yellen and set fixed rules for monetary policy. These controversial views, which are not simple to achieve in short order, could lead to increased uncertainty.

Trump’s programme is moreover not in line with the classic Republican agenda (open to migrant workers to reduce labour costs and positive for Wall Street). This is generating additional uncertainty, since we cannot be guided by the traditional Republican victories in the past...