Will the US Presidential election “Trump” stock markets?

Global stock markets are currently in a very healthy position with both the UK and US markets trading close to all time highs. The FTSE 100 Index has increased by 10% since the Brexit result and the subsequent fall in the value of sterling against the US Dollar and the Euro. It just shows how wrong the experts can be when trying to predict the future path of markets.

The next event for markets to negotiate is the US Presidential election. Some think the Clinton/Trump battle is already decided, but what impact have previous election results had on the US stock market in the past, and how has this affected investors’ returns?

Whilst many people have an interest in the election outcome, academic evidence shows few trends in stock market returns during election years.

Though it’s hard to make meaningful conclusions from the relatively small sample above, the returns themselves appear relatively random and are mostly positive.

When considering the impact on investing, it’s difficult to distinguish between political factors and other influences on stock markets. For example, the worst annual market outcome during a US presidential year in this sample was 2008 when Democrat candidate, Barrack Obama, defeated Republican nominee, John McCain. But that was also the year of the Lehman Brothers collapse and the global financial crisis. Another down year for the market was 2000, the year Republican George W Bush defeated Democrat Al Gore in a tight contest. But that year suffered the collapse of the bull market in technology stocks, the so-called “tech wreck”.

The point is that at any one time markets are being affected by many unrelated events- economic indicators, earnings news, technological change, trends in consumption and investment, regulatory and policy developments and geopolitical news, to name a few. So even if you knew the outcome of a country’s election in advance, how would you know if events elsewhere would not have greater effect on the markets?

There’s much debate about the direction of the US economy under the next President. Yet history shows us that regardless of whether they’re Democrat or Republican, there’s no impact on the longer-term direction of the stock market:

In the short term, there may well be some increased stock market volatility. The degree of this depends on how much the result varies from expectation – just think back to the run up to Brexit and the immediate aftermath!

But the 2016 US Presidential election should be viewed as just another event in a long-term investment journey. While we have a responsibility to take an interest in political elections, it’s by no means clear that these events have longstanding implications for our decisions as investors. These decisions are much more a matter of focusing on the things we can control – goals and risk appetites, time horizons, the structure and level of diversification within portfolios, and minimising costs and taxes.