With the upcoming U.S. Presidential Election just around the corner, many of us find ourselves mesmerized by political events surrounding that process. Worryingly, there have been a number of bold comments and election promises made by the individual campaigns, none more than those from within the Donald Trump camp. Trump, a man seemingly one step away from becoming the next leader of the ‘free world’ continuously makes inflammatory statements that are purely aimed at pleasing the electoral masses (as we know so well from our own experiences). On the face of it, he doesn’t seem to consider (or more worryingly fails to fully understand) the long-term implications of those statements.
To be fair, there is nothing new about this aspect of the political process in the U.S. (or for that matter anywhere else); typically (as we are already seeing), these bold pronouncements tend to be moderated as the election draws closer, until, almost inevitably, they are watered down or simply jettisoned by the successful candidate once elected. Much in the same way, data gathered over the past 182 years suggests that there is a pattern to the behaviour of the US stock market over the four-year Presidential cycle. According to the Stock Trader’s Almanac: “Wars, bear markets and recessions tend to start in the first two years of a president’s term, and bull markets and prosperous times mark the latter half.” Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year before a presidential election and nearly 6%, in the election year itself. By contrast, the first and second years of a president’s term see average gains of just 2.5% and 4.2%, respectively.
There are, of course notable exceptions to this pattern: in the election year of 2008, the market was down nearly 34%. (n.b. returns are based on price only and exclude dividends.) But we all know that the current cycle is anything but average. The Dow racked up an impressive 27% in the first year of President Obama’s second term, and 7.5% in year two. Last year, which was supposed to be the strongest of the cycle, saw the benchmark drop 2%. According to Jim Stack, a market
historian and publisher of the newsletter InvesTech Research: “Given that the past three years are so out of sync with the normal cycle, we’re not certain what 2016 will bring,”.
A question many of us are rightfully considering is that, given Trump’s campaign so far, what are the potential implications for the financial markets as the U.S.
election process rumbles on? It is well documented that extreme political candidates can “spook” investors and often have a significant impact on the global markets.
As a prime example, in a recent statement that initially seemed to have gone mostly unnoticed outside of the U.S., Mr. Trump announced his intention to eliminate the country’s $19trn debt bill within eight years, without the need to raise taxes (!). Even though, when pressed, he didn’t seem to have a coherent plan as to how he would actually do this, he did suggest that this would be achieved by imposing a ‘haircut’ on the holders of US Treasuries, who would receive 80¢ for every Dollar they initially lent to the U.S. Government (on the basis that 80¢ is “better than nothing”).
Quite apart from the fact that a default is against the U.S. Constitution (and the chance of it passing through congress are thus effectively zero), it remains the case that such statements, however reckless and ill-informed, will have a potentially powerful impact on global markets. Referencing the chart above, I wonder how the Chinese and the Japanese, amongst others, would react if they were each ‘politely’ asked to write off approximately $250billion.
The U.S. elections and the markets
