How Elections Affect Financial Markets

How Elections Affect Financial Markets
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It is no secret that when the United States chooses a new leader it either sends shivers down some people’s spines or it acts as a breath of fresh air for others.

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Coincidentally, some of these people that are affected by the new president are CEOs of companies, entrepreneurs, investors, and generally people who have some influence over the local and international markets.

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Based on the American people’s choice, these individuals always alter the way they conduct business, leading the market to completely new trends. These trends can flatten the curve of a revitalizing economy, or it could charts back up from the deepest of downturns.

How The Presidential Elections Affect The Financial Markets

Many times have we seen presidential elections affect the financial markets in a significant way, but which of them was the most significant and why? Well, there’s no 1 winner in this regard. We have to mention at least 3 presidents that through sheer presence managed to revive or break down the economic outlook of the entire country.

Barack Obama (2009 - 2013)

Barack Obama’s election in 2009 was a big surprise for most of the United States. It was the first of something for a long time for the American population and the fresh air that this new African American president was bringing to the country was something considerably positive for the overall US population.

During his first term, President Obama oversaw a record 84.5% growth of the S&P 500 index. This index is very often used as a gauge for the performance of the US economy. This was the largest growth the US economy had experience over a 4 year period for the last century or so.

However, we need to mention the sharp uptick in the S&P 500 index at the moment of announcement for Obama’s presidency is nothing to scoff at. The sudden surge of positivity in the American people’s outlook for the economy immediately showed itself on the index, thus confirming the effect that elections have on millions of peoples’ lives.

Ronald Reagan (1980 - 1985)

Ronald Reagan is sometimes referred to as the best president by foreigners, but never really fanatically loved by Americans themselves. Reagan is the creator of the notorious Trickle-Down Economics system which has been subject to many controversies in the past few decades.

Although his first term as president didn’t see too much of yield in the S&P 500 index, his second term showed a growth of over 67% which was nothing to scoff at.

One of the most notable economic situations in the USA during Reagan’s presidency was that the United States Dollar was at an all-time high. In 1985, the USD was the strongest it had ever been, fuelling a global economy rather than just the local US markets.

According to  forex broker data, even today, people who participate in direct-market forex trading refer to 1985 as the “time to be alive” due to the stability and the opportunities of profits that the USD’s strength was giving to the local population.

However, no matter how much FX traders like to reminisce about the olden days, a strong currency is not necessarily an advantage for a country heavily diving into consumer goods and upcoming SaaS (Software as a Service) markets.

Exporting these “goods” to foreign markets was quickly becoming a hassle. Very few countries were willing to accept American shipments due to the overwhelming costs from currency disparity. It is safe to say that the USD’s currency strength gave way to huge modern economies like China away into the global markets, a place they dominate to this day.

Within a few years after Reagan’s presidency, it became clear that the import quotas were much higher than exports forcing new monetary and fiscal policies under Bush senior and Clinton. Luckily though, the US managed to power through these “tough times” so to say.

George W. Bush (2001 - 2009)

Bush junior has never really been seen as an overwhelmingly powerful president for the United States. He had the misfortune of being in office during the 2008 market crash, but S&P 500 history chart shows that the downturn was coming long before 2008.

Sure the downturn can be attributed to decades of unprecedented growth in the US economy, but there were still some issues that came with Bush’s presidency.

Before re-election, the primary focus was on the US’s participation in the Middle-East and Bush didn’t really deny the possibility of using force in the region. He notoriously mentioned that he would be very careful with using the US army as nation-builders. This didn’t really say to the voters that he would avoid intervention completely, so a war-like sentiment was created.

Pair that up with the 2001 September terrorist attack and the subsequent declaration of war on Terrorism and the deployment in Iraq and we get an economy pushing down its weight on an already struggling S&P 500.

The first term didn’t really suffer that much as only a 12.5% decrease was noted, but during the second term, when the 2008 crisis hit, Bush saw more than a 31% decrease in the S&P 500 index by the time he was replaced by Obama in 2009.

The Bottom Line

Overall, we can say that the outcome of the elections can most definitely impact financial markets. Whatever a candidate campaigns for during the election period is immediately taken into account once he or she is voted into office.

The psychology of investors is that no matter what this candidate has promised to do within 4 years, the moment they are elected it means that those policies are already in place. So it turns into a scramble of preparation and damage-control, throwing markets into disarray. Sometimes creating amazing opportunities to build fortunes, but other times trapping investors in an inescapable bearish market.

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