U.S. presidential elections have significant economic and financial implications. Historically, events like wars, recessions, and bear markets often occur in the first half of a presidential term, as evidenced by the Russia-Ukraine conflict and the 2022 bear market.
In contrast, the second half of the term—particularly pre-election and election years—tends to bring periods of prosperity and bull markets, reflecting stronger market conditions. The table below illustrates the price reactions of the S&P 500 on election day and the following day since 1928:
On election day, the S&P 500 has historically posted an average gain of 0.92%, with a 77% hit rate, reflecting investor optimism and positive market expectations. However, the day following elections tends to see a shift, with the S&P 500 averaging a -0.71% return and a 65% hit rate, indicating that initial market euphoria often fades into a period of correction or more measured sentiment.
Before 1980, U.S. financial markets were traditionally closed on election day to allow both voters and market participants to fully engage in the election process. Since then, markets have remained open, reflecting modern trading practices. These trends demonstrate that while election years often provide long-term market gains, short-term volatility is a factor that traders and investors need to consider.
Presidential Indicator as a Forecast Tool
In U.S. election years, when the S&P 500 rises between July 31 and October 31, the incumbent president has historically retained power in 85% of cases (11 out of 13 election years since 1936). On the other hand, a decline in the S&P 500 during this same period has resulted in a change of power 89% of the time (8 out of 9 years). Notable exceptions to this pattern occurred in 1968, 1980, and 1956. Based on this year's market performance, the indicator currently favors a Democratic victory.
In summary, the historical relationship between U.S. presidential elections and stock market trends offers valuable insights for investors as they prepare for potential market shifts ahead of the election.
Market Outlook for the Bonds Market
The 2024 U.S. presidential election is fast approaching, and its outcome is likely to have a profound impact on global bond markets. As the largest economy in the world, the U.S. wields significant influence over global trade, economic conditions, and geopolitical stability. The election process and its results are expected to affect key economic indicators such as interest rates, inflation expectations, and bond market behavior.
Impact on U.S. Treasuries
Investors in global bond markets, particularly those holding U.S. Treasuries—commonly seen as safe-haven assets—are especially sensitive to the uncertainty surrounding elections. Demand for U.S. Treasuries tends to increase in times of economic or political uncertainty. For example, following the 2000 U.S. election, the yield on the 2-year Treasury bond plummeted by nearly 60% over the subsequent 12 months. This drop reflected heightened demand for bonds, as investors sought safety amid uncertainty.
Fiscal Policies and Bond Yields
The bond market is highly reactive to fiscal policies introduced by the incoming president, which can influence bond yields in different directions:
Increased Political and Economic Risks: If the elected leader brings greater political or economic uncertainty, investors may require higher risk premiums. This can push bond yields higher as markets adjust to the elevated risk.
Aggressive Fiscal Spending: A candidate favoring aggressive fiscal spending could increase government debt, inflation, and interest rates, leading to higher bond yields. As inflation expectations rise, investors demand higher returns to compensate for the potential erosion of purchasing power.
Conservative Fiscal Policies: Conversely, a leader with more conservative fiscal policies might ease inflation concerns, resulting in lower bond yields.
Global Impact
U.S. election outcomes can also influence international bond markets. A stronger U.S. dollar, driven by economic and political shifts, can attract capital flows to the U.S., potentially causing a repricing of bonds in other regions, such as German Bunds or Japanese Government Bonds (JGBs). When U.S. bond yields rise, foreign investors may shift capital from international bonds to U.S. assets, impacting global bond yields.
In summary, the historical patterns of U.S. elections and their effects on bond markets provide valuable insights for investors navigating the volatility associated with election cycles. The 2024 election will likely follow similar trends, with the potential for both short-term market fluctuations and long-term shifts in economic policy impacting bond yields globally.
Geopolitical and Trade Policies
Another significant way the U.S. election can impact global bond markets is through the next administration’s trade policies. A strong emphasis on protectionism or imposing trade barriers—seen in both the Trump and Biden administrations—can heighten global trade tensions, disrupt supply chains, and increase costs, contributing to inflationary pressures.
Such risks often lead to heightened volatility in global bond markets as investors reconsider their exposure to economies reliant on trade. Countries with strong trade ties to the U.S., like China, Mexico, and Canada, are particularly vulnerable to bond market fluctuations as the election campaign unfolds, with potential shifts in trade policy playing a key role.
The Bottom Line
U.S. elections have significant implications for global bond markets, influencing factors such as inflation expectations, monetary policy, geopolitical risk, and global trade. The uncertainty surrounding fiscal policy, potential changes in the Federal Reserve’s response to different economic agendas, and shifts in global trade dynamics are expected to introduce volatility into fixed-income investments.
For global investors, understanding these complex interactions is crucial. Navigating bond markets during election cycles requires a thoughtful approach, considering both domestic influences and international economic factors to manage risks effectively.
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