What Could The S&P 500 Tell Us About Trump’s Re-Election?

Does the stock market get influenced by a presidential election? Or does the stock market return during an election year actually indicate the likely winner? With little over a year left for the U.S. to elect its president, these questions are likely to be at the top of many minds. Looking at historical data for the previous 60 years, an above average annual return from the S&P 500 Index could indicate that a Republican is more likely to be elected president, which bodes well for Mr. Trump if the market captures healthy double-digit growth.

You can view the Trefis interactive dashboard – Understanding The Link Between S&P 500 Index Returns And U.S. Presidential Election Outcome – to better understand the past market trends in election years and election outcomes, and the sign of any connection between the two.

S&P 500 Return From 1956 To 2016

• Over a period of the last 60 years (1956 to 2016), which included 16 presidential elections in the US, the S&P 500 Index has given positive returns in 14 of these election years, which means a positive performance 87.5% of the time.
• Highest return of 32.4% was in the year 1980, following which Reagan (Republican) was elected president, whereas, the lowest return of -37% was in 2008, when Obama (Democrat) won.
• The index has given a double-digit return in 6 election years leading to a Republican victory, and 4 times before a Democrat was elected.

Average Return Much Higher Leading To A Republican Victory

• The S&P 500 index average return for all election years from 1956 to 2016 is 9.8%
• However, average return during the election year leading to a Republican president being elected is above average, at 11.8%
• At the same time, the index has returned only 7.2% leading up to a Democrat winning the race.

Change In Party Winning

• Average index return in the year leading to a change in the party which wins the presidential race is low at 5.2%, suggesting that on most occasions, the market has not been very buoyant when there was a higher chance of the incumbent party losing the election.
• It would be interesting to see the next one year return from this perspective as well.

Can Next 1 Year Market Performance Predict Trump’s Fate?

• As we have seen from the past trend, a thumbs up from the market has generally been followed by a Republican getting elected, except in the case of a Democrat being re-elected, when the average return has been 18.5%.
• However, this is not a possibility in 2020 as the incumbent is a Republican.
• Thus, currently it would be helpful to focus on market performance during the election year when the incumbent president is a Republican.
• During elections when a Republican candidate is elected after a Republican, the index has performed very well with the average return during such election years being 11.9%.
• At the same time, average annual return when a Democrat is elected after a Republican is -1.3%. However, even if we discard the negative return of -37% for 2008 (as the economy was gripped by the global financial crisis), the average return during such election years was 10.7%, lower than 11.9% leading to a Republican getting re-elected.

Thus, it would be interesting to watch how the S&P 500 performs in the next 1 year leading up to the 2020 presidential vote. If past market and election trends are anything to go by, a healthy market return over the next one year could indicate and increase the likelihood of a favorable outcome for Mr. Trump. Whereas, subdued market return (mostly single-digit return) could send the alarm bells ringing in the Republican camp.

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