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Opus News & Insights

Presidential Election 2016
Tuesday, November 8, 2016

It’s Election Day in the United States, where it is the American people’s right to cast their vote to help direct the country in whichever direction they feel is best, or for this election, whichever direction they feel is less detrimental. The 2016 Presidential Election may be one of the most polarizing in recent history, which has left many investors wondering what will happen to the stock market in the near future as a result of electing our 45th President.

Since 1952, the S&P 500 has been down three times in a presidential election year; all three were during open elections. According to Strategas, the S&P 500 has correctly predicted 19 of the past 22 presidential elections going back to 1928. If stocks are higher in the three-month period before an election, the incumbent party wins. Even with the S&P 500 up 2.2% yesterday, stocks are still down 2.3% since August 8th, suggesting a victory for the challenger, Donald Trump.

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Since 1929, there has been a consistent theme that a Democrat winning the election has been better for the stock market in the first year of presidency than if a Republican were to win. This seems apparent in 2016, as the market rose 2% yesterday, presumably because the FBI cleared Hillary Clinton of any wrongdoing in the highly covered email scandal, which may pave the way to a Clinton presidency. On average, when the incumbent Democratic party has kept the White House, the market rose 7.8% compared to a decline of 10.2% if a Republican were to take the White House from a Democrat. The best case scenario, historically speaking, is if a Democrat were to take the White House from a Republican. Most recently, in 2008, the market rose 6.8% in the 12 months following President Obama’s first term win, underperforming the historical average of 17.2%, though skewed by the 2008 financial crisis.

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The VIX skyrocketed 73% from 13.0 on October 24th to 22.5 on Friday, November 4th on increased speculation surrounding election results and after the FBI announced that it would reopen its investigation of Mrs. Clinton’s private email server. Over the weekend, FBI chief James Comey told Congress that he had affirmed his July 5th decision that Clinton’s emails did not warrant any new action. As a result, the VIX dropped 17.5% to 18.6. Even though the S&P 500 has had a remarkable track record of predicting the U.S. Presidential election, it may have an upward battle on Election Tuesday as Hillary Clinton, now, has an 80% chance of winning, according to Strategas.

While history shows that this outcome may bode well for stocks relative to a Trump victory, we are reminded of two things. First, we are looking at a small sample size, and correlations does not equal causation. Second, the ability of politicians to affect markets is limited or, as Samuel Johnson so eloquently put it, “How small, of all that human hearts endure, That part which laws or kings can cause or cure. Still to ourselves in every place consign'd, Our own felicity we make or find:”  Central bankers, on the other hand…




 
 
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