The US Election's Impact on the UK Stock Market
FOREX.com August 26, 2020 1:36 PM
What is the impact of the US election on the UK stock market? Our experts weigh in on what UK investors can do to protect their portfolio come November.
The US Election’s Impact on the UK Stock Market
It’s no secret that trading patterns during an election cycle can affect your portfolio. Advanced knowledge regarding potential outcomes is key to weathering future results as an investor. As we move closer to November, the 2020 US Presidential election will inevitably affect not only the US stock market, but equities across the globe.
What will happen to the market before and after November 2020? The impact of the US election on UK stocks is uncertain, and results cannot be guaranteed. However, a closer look at past patterns can directly inform your long-term investment strategy. Read on for our expert outlook for the UK stock market before and after inauguration day.
How presidential elections affect the UK stock market tends to correlate with a standard presidential cycle. Tumultuous economic events such as recessions, tax cuts, and downturns usually occur within the first two years of a sitting President’s term. Therefore prosperous growth is more likely to arise in the second half of a presidential term, when incumbents seek to stimulate the economy to increase their odds of re-election.
This concept, also known as The Presidential Election Cycle Theory, was first developed by Stock Trader’s Almanac founder Yale Hirsch. According to this theory, after the first year, the stock market generally sees improved performance over the next three years until the cycle repeats itself with the next presidential election.
Most experts imply it is hard to predict anything concrete about the impact of the upcoming election on the stock market. The S&P 500 has traded positive in each six-month period preceding a presidential election since 1990. Stock market returns tend to be slightly lower the following year.
The 2019 Dimensional Funds report indicates a favourable market in 19 of the last 23 election years spanning 1928-2016. Negative returns only arose four times during that time.
Stocks tend to prefer re-electing a sitting president than electing a new one. When a new party takes power, analysts found market gains averaged at 5%. When a president is re-elected, or the same party retains political control of The White House, returns increased to 6.5%.
Market disruption is more important than the specific political party of the president-elect; markets don’t usually play favourites between parties. A sitting president seeking re-election guarantees a degree of certainty due to the proven advantage of incumbency in presidential elections.
Some UK financial experts maintain that Britain remains in “pole position” amidst the ongoing pandemic recovery and political uncertainty in the US election. Research suggests the global market may see drastic changes in two critical scenarios. A new party coming into power with new policies and legislation could have a ripple effect on global markets, and one party retaining control of The White House due to re-election could also lead to higher returns.
To understand how the US elections may impact the stock market this year, a retrospective look at past elections is key. Market data illustrates that the US presidential election has roughly coincided with significant turning points in the UK market, most recently in 2008. In addition to the adverse effects of the 2008 financial crisis, this pattern is evident in other crucial election years, including 1960 and 1968:
Source: The Almanacist
Keep in mind that stocks are likely to be volatile in the months leading up to an election due to heightened political an deconomic uncertainty. Plus, many investors are quick to sell stocks based on any news that may negatively affect their investments. This abundance of caution can lead to abrupt drops in the market.
Some analysts warn this year may be the most consequential in history for the UK economy. Experts suggest investors prepare for a high potential for global volatility in the election’s wake regardless of the outcome.
What’s the key to preparing your portfolio for 2020? A longer-term strategy designed to outlast one election cycle with a fully diversified portfolio. Don’t hesitate to embrace volatility to capitalise on gains.
Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
As the chart above shows, the markets have rewarded long-term investors regardless of the election outcome since 1926. Advanced knowledge and preparation are critical when planning your investment goals in an election year. As Donald Trump and Joe Biden vie for victory, evaluate your chief trading decisions through the lens of past patterns to tackle future growth.
As you prepare for the future, contact us to learn more about how to take advantage of market opportunities. Let’s rejuvenate your trading strategies today as a new presidential cycle unfolds tomorrow.
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