Going into this year’s US presidential election, we have a Republican incumbent whose party currently holds majority control in the Senate but not in the House. Current polling suggests President Trump will lose the election, while Senate control is less clear. In this piece, we look at what we may expect from markets under different 2020 US election outcomes using only the historical performances of markets around different possible scenarios. The main conclusions:
President Donald Trump’s 2016 election win and the Republican clean sweep in the House and Senate had a broadly positive impact on markets. The Trump win pushed the S&P 500 up 2% within the first week, and 3ppts higher than the average stock market reaction after previous US elections (Chart 1A). This positive equity response persisted for the full six months after election day, with markets being higher on just two other occasions (1998, 2012).
FX markets also moved higher following the 2016 result, with the USD immediately appreciating against both EUR and JPY by 3% and 4.5%, respectively (Chart 1B). The USD peaked within the first month, after which there was a more significant correction in USD vs EUR. The broader dollar also followed these trends (Chart 1C).
Bond markets were arguably the most responsive to the Trump win. The US 10yr bond yields rose by 40bps within the first week (1.8 to 2.2). Front-end yields (2yr) were less responsive but continued to rise throughout the year. These large bond movements were not unique to the 2016 election. Bond yields have been particularly responsive in recent elections (Chart 2A). Yields fell 9bps and 17bps within the first week after the 2012 and 2008 elections, respectively. In 2004, yields rose 16bps after Republican George Bush Jr won re-election. Moreover, bond yields have typically risen on Republican wins (Chart 2B).
In our recent Deep Dive, we presented the academic literature on US elections, which pointed towards higher S&P 500 returns following Republican presidential wins. We find similar evidence, but only within the first month after election days (Chart 3A). Market performance under each party is even around the three-month mark, but beyond three months, equities favour a Democratic president.
Over the last 72 years, the S&P 500 has risen 1% in the week before US presidential elections, followed by a 1% fall in the week after (Chart 3A). Also, stock market returns have been higher in the year leading up to the elections compared with the year after (although both are positive).
On FX, the dollar index, USD/EUR and USD/JPY all move very little in the weeks before and after the US elections (Charts 3B-D). Over a six-month to one-year horizon, the USD tends to appreciate more in the run-up to elections compared with the same time horizon after elections. This is not the case for the USD/JPY – the dollar has historically depreciated before the election, which is followed by an appreciation post-election. Lastly, the USD has appreciated more in the long run under a Republican president than a Democratic one (except USD/DEM after 1yr).
Betting markets are offering lower odds on a Democratic clean sweep. Historically, this result would have negative consequences on S&P 500 returns in the months following the election (Chart 4A). After six months, a Republican clean sweep has previously added on average 6% to the S&P 500, compared with 2% under a Democratic clean sweep. This gap reduces to 3ppts after one year, but equity markets still favour a Republican clean sweep.
Comparing S&P market performances under a clean sweep relative to the average election year (Chart 3A), equity moves have been more extreme when a party wins the clean sweep. Under a Democratic clean sweep, the S&P 500 is 1.5%, 2.2%, 3.3% and 5.5% lower after the 1m, 3m, 6m and 1yr time horizons respectively.
Bond markets have also made a clear distinction between Democratic and Republican party clean sweeps (Chart 4B). US 10yr bond yields have fallen significantly after a Democratic clean sweep, while they have risen under a Republican administration (note, there have been just two Republican clean sweeps during the sample period).
On FX markets, the dollar index tends to be lower relative to the average election year under both clean sweep scenarios across a 3-6m horizon, but it appreciates more in the first week (Chart 4C). Furthermore, the dollar has historically weakened one year after a Democratic clean sweep, compared with a small rise under a Republican one.
Interestingly, there is a significant difference in USD/JPY developments under a Democratic and Republican clean sweep (Chart 4D). A Democratic clean sweep has historically led to dollar weakness before and after the US election, while depreciations before the election have been followed by appreciations when the Republicans win.
Two further scenarios could occur. One, Trump gains re-election and the Republican Party controls the Senate. Two, Biden wins and the Democratic Party retains control of the House.
From an equities perspective, investors would favour the current status quo (Republican president, Republican Senate and Democratic House). This outcome has historically led to an above-average stock market performance and increases one-year returns to 8% (1% higher than a Democratic presidential, Republican Senate and Democratic House). Both outcomes would yield still higher returns after one year compared with the average US elections year (Chart 5).
In FX markets, the dollar tends to appreciate going into a US election in which the second rather than first scenario happens. This phenomenon does, however, reverse following the elections. Strikingly, six months to one year after a Democratic presidential and House win, the dollar is significantly weaker relative to the EUR and JPY compared with the average year in which a Democratic president has been elected (Chart 6B-D).
Lastly, bond yields tend to be higher in any form of Republican win (Chart 6A). There exists 75bps difference in bond yields in the first month after the election between the two scenarios. The results are, however, most likely skewed by the significant bond yield rises following the Trump win in 2016 and yield declines following the Barack Obama win in 2008.
This situation happened in 1984 (mentioned in intro) and 2012, when Obama was re-elected but the Democrats were unable to take control of the House. What happened on these two occasions? In 1984, Ronald Reagan’s Republican Party held the Senate going into the election, and the status quo remained post-election. In 2012, Obama’s Democratic Party held the Senate going into the election, and they retained control over it post-election.
On both instances, the S&P 500 dropped immediately and by more than the average (grey line) after election day, while the dollar index rose steadily for up to a week after (Charts 7A, B). The bond market implications are less clear – after the Obama win, US 10yr yields fell, while they rose in 1984 (Chart 7C). Finally, USD/JPY movements in 1984 and 2012 seem to follow each other closely – an initial one-week decline was followed by a USD appreciation in the months to follow (Charts 7D). Interestingly, the USD/DEM also follows a common path, appreciating for up to a week after the election days.
There have been two instances over the last 72 years where the incumbent president has lost on his re-election campaign – Jimmy Carter in 1980 (Democrats beaten by Republicans) and George Bush Sr in 1992 (Republicans beaten by Democrats). Stocks responded positively to the 1980 election result, rising 2% in the first week (Chart 8A). Meanwhile, stocks fell by 1% after the Democrats beat the Republicans in 1992. In the medium to longer term (1-6m), the S&P 500 performed better in 1992, rising 6% in the first three months.
The dollar index strengthened 2% in the week following the 1992 Democratic win, while it fell after the 1980 election outcome (Chart 8B). The appreciation in 1992 was the second largest post-election rise after Trump’s 2016 election. In the three months following both elections, the dollar appreciated, thereafter falling in 1992 while further strengthening in 1980. The USD appreciated against both the DEM and JPY following both elections (Chart 8D).
US 10yr bond yields rose twice as much as any other election (1964-2016) in the first week after the 1980 US elections (Chart 8C). Yields were also up one month after both elections. Indeed, the positive bond yield performance (up 3bps) in 1992 was the joint largest one-month rise since the end of WWII under a Democratic president (average is down 33bps).
To finish, we look at market movements following the 2008 Obama election win. The standout features in Chart 9 are the significant drops in the S&P 500 and US 10yr bond yields around the election day (Chart 9A). Despite the downward spiral in stocks, equities actually performed better than average one week prior to the election (up 3%). Any respite was short-lived, however, as markets fell 7% the week after. Bond yields suffered a similar fate, rising 8bps the week before and falling 17bps the week after the election.
There were mixed reactions in FX markets. The USD appreciated against the EUR, while it depreciated against the JPY in the first week after the election. Throughout the following year, the USD weakened against both, contrary to developments following previous elections. Dollar and trade-weighted indices rose in the run-up to the election but dipped the week before. In the month following the result, all three indices continued to rise, but they reversed after three months (Chart 9B-C).
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