Commentary: US elections and markets

US presidential elections tend to be consequential for geopolitics and the global economy. But how do markets deal with election-related developments? It is well understood that markets react to the day-to-day news cycle; but what about over a period of one year; do elections leave a lasting impact on assets like the US dollar, the stock market, or bonds? Are their discernible movements before and after the elections?

Using 50+ years of data, covering elections from 1968 to 2020, we analyse the relationship between election outcomes and asset returns. One thing that immediately comes across is that elections spanning major global financial market events are characterised by substantial price swings. In the 12 months after the Nov 2020 elections, the US stock market delivered an astonishing 40% return, but how much of that was related to Joe Biden taking office and passing fiscal support measures, and how much was a function of the post-pandemic re-opening of the economy? Such caveats are key considerations in event studies of this nature.

With Donald Trump expressing a preference for a weak dollar, we find it worthwhile to start the study by tracking the USD. We find that on average, the dollar appreciates mildly before the elections (regardless of a Democratic or Republic win) and tends to be flat thereafter.

In the 12 months after Trump’s 2016 win, the DXY index weakened as per his goal, but only by 4%, not material for restoring US manufacturing competitiveness. Trade and tariff war in 2018/19 pushed up the USD, contrary to Trump’s objective. 

The stock market does well during elections, doing better in the lead-up to a Republican win (+9.9%), while doing very well after a Democratic win (+17.2%).

What about the US bond yield, source of much concern given soaring debt and interest payment obligations? Turns out the bond market sells off a tad before a Republic win and rallies a tad before Democratic win, while rallying after a Republic win. But the Republican-win related outturns are disproportionately impacted by 1980s Reagan/Bush era. Since then, other than the GFC-adjacent 2008 election, bond markets have largely shrugged off US elections.  Bottomline, election cycles seem to be significant for stocks; for bonds and the dollar, not quite so much.

Adjusting our GDP and inflation forecasts

The equity markets may be undergoing some angst over earnings disappointments and elevated valuations, but the US economy continues to deliver strong growth numbers. 2Q24 national accounts release was characterised by better-than-expected numbers. Real gross GDP increased at an annual rate of 2.8%, double that of the 1Q24 outturn of 1.4%. The increase in the second quarter primarily reflected increases in consumer spending, inventory investment, and business investment. Imports increased as well, reflecting rising domestic demand. We are compelled to raise the 2024 forecast based on this data, forecasting a real GDP growth of 2.3% (2% earlier).

The dataflow is a bit mixed. We see easing PCE inflation, investment-led 2Q growth, soft retail sales, and a marginally cool job market. 2Q24 may well be the high-water mark for growth this year, but we don’t see a major correction in demand, short of some financial stability issues. On the inflation front, the personal consumption expenditure index, the Fed’s preferred measure of underlying US inflation, rose at a relatively tame pace in June, which can be seen as encouraging for FOMC officials looking for signs of cooling inflation.

June PCE was up 2.5%yoy, while core PCE was up 2.6%yoy (0.2%mom). Goods prices dropped 0.2% after falling 0.4% in May. Prices for motor vehicles and parts declined 0.6%. Furnishings and durable household equipment prices dropped for a third straight month, while gasoline and other energy goods decreased 3.5%. Clothing and footwear were cheaper for a second straight month. We see the core PCE heading toward 2.5% toward the end of this year, although further disinflation may be hard to achieve, given that services inflation is yet to be tamed decisively.

Signs of cooling in the labour market are starting to translate into less purchasing power. Wages and salaries rose 0.3% in June, half the prior month’s pace. On an inflation-adjusted basis, disposable income growth slowed to 0.1%.


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