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Market Behavior during the US Presidential Elections
Of all the events that move the market, presidential elections in the United States have always been among the most significant. Of course, it won't be any different in this year's 2020 elections between Donald Trump and Joe Biden. For those wondering when the elections will be held, they are on November 3rd. On this date, all traders should be very attentive because it will undoubtedly have a significant impact on the financial markets.
Market patterns arise from the incumbent party's motivation to provide good economic news to voters before the election year. The behavior of the stock market during the election year is always more erratic, as parties battle to claim credit for good economic news and blame their rivals for the bad. In this year 2020, we have seen very volatile and unpredictable behavior due to the coronavirus (COVID-19). In March, it seemed like the markets were plummeting uncontrollably, but just days before the American elections, we are near all-time highs in all US indices.
Normally, the year before the US presidential elections (the third year of the president's term) sees the most solid market gains, followed by a reasonably solid election year. The two years following the presidential elections show below-average results as the new administration tries to implement campaigns that prove unpopular. In reality, only in the first year can the President of the United States push for serious reform. From the second year onward, congressional elections become more important, and political action clearly takes this into account to implement more popular measures to attract voters.
There is the possibility of an eight-year presidential term in the United States. The actions of a president who cannot be reelected, which is not the case with Donald Trump, are likely to be different from those seeking another term. Therefore, we should expect a different pattern. This can become even more complex when studying patterns in the financial markets that precede and follow a party change, all of which have a basis in the behavior of political parties and voters.
We can visualize the behavior of the S&P 500 index one year after the election of the President of the United States in the following table.
In this table, we can see that the future returns of the S&P 500 confirm the expectations of the presidential cycle in the United States, as returns in the year of the US presidential election show excellent performance due to the promises of all political parties aiming to be elected.
The trend of the S&P 500 index has always been bullish, regardless of the political party in power in the United States, as demonstrated by the image below.
Sources: Morningstar and Standard & Poor's
This chart shows the performance of $10,000 from 1933 to 2020, reinvesting profits. The unstoppable upward trend in financial markets is evident regardless of the ideology of the Presidents of the United States of America.
Does this cyclical pattern of US presidential elections affect algorithmic trading systems?
Certainly, it does. For long-term strategies where trades last several months or years, the stage of the presidential cycle will undoubtedly have a significant impact on the behavior of these types of strategies. Short and medium-term swing trading systems can also be affected by the presidential cycle, but to a lesser extent. Short-term and intraday trading systems may be influenced in the days leading up to and following the election day. This will be more noticeable if the markets had priced in the election of one president, and the result is the opposite, as was the case in 2016 with Hillary Clinton and Donald Trump.
Written by Quantified Models
