More often than not, whenever a presidential election year is underway, you will hear a lot of news anchors and financial analysts talk about the economy and the stock market. There will often be self-proclaimed experts who have their theories about how a presidential candidate will affect the market during election year, how investors may react as Election Day draws closer. But there's a lot more to the workings of the stock market than simply the candidate or their political party. While an incumbent or new president can have some impact on the market, you have to look at a couple other factors.
Election Years Will Usually Have Some Period Of High Volatility
Given that elections, especially US elections tend to be close and it's hard to predict who will win, investors sometimes sell off or lower holdings in the market as Election Day draws nearer. As a CNBC article once explained, there are often many election years when the S&P 500 index trades at higher levels and sees rallies during these years, but then things become more volatile and slow down later in the summer. The markets could react in unusual ways if the nature of the election year and the presidential candidates themselves are a little out of the ordinary such as 2016.
Presidential Policies Also Matter
Both domestic and foreign investors want to know what kind of policies the presidential candidates will be implementing. Strong economic performances with an incumbent usually bode well for them, and a reelection could inspire greater investor and consumer confidence. Plus, as some analysts may say the markets may favor the candidate whose policies would include deregulation across economic sectors, or bringing minimal government involvement into the economy. Although if the economy has undergone troubled times, the markets may favor a candidate who intends to sign laws aimed at stabilizing the economy.
Market Bubbles Can Override Incumbent Or Incoming Candidates
In some cases, you have actions that have been occurring in the markets that cannot be controlled no matter who the candidates are. These would include the three bubbles of the last century that caused a recession or depression that came from investor actions that had spurred bubbles. When President Herbert Hoover was elected in 1928, American consumers had been flooding into the stock market driving some stock prices up way too high and forming bubbles that led to the crash of 1929. And in 2000 and 2008, the market took a hit in both the beginning and end of the George W. Bush presidency thanks to both the dot-com crash and the subprime mortgage crisis. All that to say there are periods such as these where investor activity does not correspond with political activity.
Always Keep An Eye On The Fed
The actions of the Federal Reserve are also going to affect the market, and sometimes they may quietly act during election years. Not only can the Fed impact the market by raising and lowering interest rates especially during an election year, but don't forget that during periods of quantitative easing money can find its way into the stock market and artificially boost it. So while presidential candidates and congressmen do matter, never forget the Fed will always be a big player.