US Presidential Elections and the Markets - A Historical Guide
How Have US Presidential Elections Impacted the Stock Market, US Dollar and Gold?
“It’s the economy, stupid!”
In a classic political slogan, Bill Clinton’s campaign strategist James Carville succinctly summarized the impact that the economy and markets can have on the results of a Presidential election.
The opposite phenomenon, how elections impact markets, is far more difficult to boil down to a catchy 4-word saying. If I had to try, I would say something like “markets hate political uncertainty.” In other words, major elections bring the potential for significant changes to laws, domestic priorities, and international relationships, and markets often rein in risk appetite ahead of major elections. However, once an election is decided – regardless of the result – traders have a clearer picture of how the future will look and often feel more comfortable once the uncertainty is resolved.
Rather than relying solely on such vague proclamations however, this guide aims to provide context for how markets from the US dollar to the stock market to gold have historically reacted to different US political environments. Of course, every election brings its own unique circumstances and stakes, so the data and figures in this guide should not be taken as gospel for any particular election in the future. As you may have heard before, past market performance is not necessarily indicative of future outcomes.
Likewise, your approach to trading around elections may be different than another trader who reads this guide. For example, you might see politics as a potential setup for trade opportunities, whereas another trader might sit them out entirely, opting to remain to the sidelines until the future outlook is less cloudy. Either way, please be aware that political events can cause significant market volatility and increase risks.
Regardless of your preferred approach, a thorough, historically-informed perspective of the potential impact of US elections on markets will help you better prepare for and plan around situations when the political stakes are high, as to mitigate this risk.
Table of Contents
- How Have US Elections Impacted the US Dollar
- How Have US Elections Impacted the Stock Market
- How Have US Elections Impacted Gold?
- Conclusion
- Disclaimer
How Have US Elections Impacted the US Dollar?
In what will become a common refrain throughout this guide, it’s important to remember that politics alone are rarely a strong driver for currency values. The primary factors that drive the long-term trends in the US Dollar – things like interest rates, trade balances, and capital flows – are either entirely or mostly out of the control of the President.
With that caveat out of the way, there have been some notable small-sample tendencies in the performance of the US dollar depending on the political party of the US president over the past few decades. As the chart below shows, the US Dollar Index has shown a tendency to fall during Republican presidencies and rise during Democratic presidencies dating back to George H. W. Bush in 1988:
Source: StoneX. TradingView data. Past performance is no guarantee of future results.
As with any historical market data, changing the timeframe can change the conclusion; the greenback generally fell throughout Democratic President Jimmy Carter’s term from 1976-1980 and rose during Republican Ronald Reagan’s first term from 1980-1984 before reversing those gains in his second term.
Interestingly, a study titled “U.S. Presidential Cycles and the Foreign Exchange Market” in Review of Financial Economics found that there have been inter-term patterns depending on which party controls the White House. The study’s authors’ summary follows:
“We examine the association between the foreign exchange rate of the US dollar and US presidential cycles. Results show that Republican presidencies tend to start with a strong dollar, which then depreciates over the course of the presidency. In contrast, Democratic presidencies tend to begin with a weak dollar that then appreciates. These patterns result in an apparent presidential effect in US foreign exchange rates.”
Ultimately, these types of historical patterns can be useful, but only if they extend into the future. Without a clear causative explanation, readers may want to be skeptical about putting too much stock (no pun intended) into trading around them in isolation.
How Have US Elections Impacted the Stock Market?
Before delving too deeply into the specifics, it’s important to remember one key fact when analyzing the impact of US elections on the stock market: Broad stock market indices like the S&P 500 usually rise, regardless of who is in office.
Since 1961, the S&P 500 has generally seen positive returns across presidential terms, with Richard Nixon and George W. Bush being the only two exceptions in the last 60+ years:
Source: StoneX. TradingView Data.
Past performance is no guarantee of future results. Data includes the price-only return of the S&P 500, excluding dividends. *Biden Presidency returns though the end of Q1 2024.
In other words, while some readers may be tempted to dramatically adjust their portfolio or trading strategy based on their political beliefs about the chief resident of 1600 Pennsylvania Avenue, it’s important to remember that hundreds of millions of Americans (and billions of citizens around the globe) will still wake up the next day and trudge off to work, contributing to continued profitability and innovation at the large companies that make up the stock market.
Getting a bit more granular, many analysts have identified a potential 4-year Presidential Cycle, where stock market returns have historically been lower in the first half of a President’s term before relatively strong third and fourth years in office. The general explanation for this theory is that when a newly-elected President takes office, he often focuses on fulfilling campaign promises around non-economic priorities like social welfare issues before pivoting back to boosting the economy to bolster his chances of getting re-elected (or getting members of his party re-elected).
Source: Stock Trader’s Almanac, US Global Investors. Past performance is no guarantee of future results.
As the chart above shows, the S&P 500’s long-term track record displays this pattern, though it’s worth noting that, like many published market anomalies, the relationship has been less clear in recent years:
Source: WT Wealth Management. Past performance is no guarantee of future results.
Of course, the President isn’t the only relevant politician in the country – looking at which party controls Congress can also be informative for traders. Perhaps not surprisingly, under both Democratic and Republican Presidents, the best annualized returns for the S&P 500 have been realized under a divided Congress, where one party controls the House or Senate and the other party holds a majority in the second chamber:
Source: YCharts. Past performance is no guarantee of future results.
Historically, the S&P 500 has also seen lower returns on average during periods when Democrats have held majorities in both the House of Representative and the Senate, though the market has generally seen positive returns regardless of the composition of the national government.
While it may be beneficial to keep these historical patterns in the back of your mind, more immediate policy, geopolitical, and valuation considerations tend to be more potent drivers for stock market performance.
How Have US Elections Impacted Gold?
The historical relationship between US Presidential parties and gold’s performance is potentially even less clear than the association with stocks and the US dollar.
Looking at the chart below, gold rallied strongly under both Republican and Democratic US Presidencies throughout the 1970s until 1982, when it then fell under both parties until 2000. The precious metal then started a new secular bull market the continued regardless of the President’s party for the next couple decades:
Source: StoneX. TradingView data. Past performance is no guarantee of future results.
Drilling down to a shorter-term timeframe, gold’s performance in the period immediately after a presidential election has shown a slight tendency to favor of the Democrats. According to the U.S. Money Reserve study, Democratic victories saw an average gold price increase of +0.5% versus an average drop of -1.1% in the two weeks after a presidential election since 1980.
This impact is even greater during the period between Election Day and Inauguration Day. Democratic presidential election wins have led to an average gold price increase of +1.5%, while Republican wins brought a -5.5% decrease on average, perhaps on the assumption that Republican presidents will place a greater emphasis on fiscal conservatism and decreased government spending:
Source: US Money Reserve. Past performance is no guarantee of future results.
The majority of these short-term impacts has been driven by gold’s strong performance immediately after Barack Obama’s elections and weak performance following Ronald Reagan’s elections, so readers may (once again) want to take these trends with a grain of salt.
Conclusion
Ultimately, the politicians and parties occupying the White House and Congress are just one of the many variables that drive the stock market, the US dollar, and gold. Though the historical returns highlighted above cover decades (and in some cases, more than a century) of price action, it’s important to remember that absolute number of presidencies included are still relatively small and markets are constantly evolving.
For some readers, the uncertainty leading up to a close election can provide potential trading opportunities, but the direct impact of elections on markets is often exaggerated, especially by those with strong political views. Still elections can cause significant market volatility and increase risks.
At the end of the day, the most important takeaway is to focus on developing a sustainable trading strategy that works regardless of which way the political winds are blowing at the moment and a plan to mitigate the increased risk.
-- Written by Matt Weller, Global Head of Research
Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on X: @MWellerFX
