Trump & the Market: Analyzing Market Reactions to Political Uncertainty

When America’s most contentious presidential election headed down the home stretch, and Donald Trump closed in on a victory that made seasoned political pollsters look like rookie television weather forecasters, chilling news soon trickled out: The Dow Jones Futures were plunging.

Was this the apocalypse? Famine, death, and war — followed by descending locusts?

Not exactly.

The stock market (You will need Adobe Reader to view the PDF Download Adobe Reader) rallied immediately and by the end of the week, closed at a record high of 18,920. The Dow Jones Industrial Average was up 990 points, or 5% for the week. The NASDAQ market finished at 5,225, up 167 points and the S&P 500 Index ended the week at 2,165, a gain of 77 points.

The market’s meteoric rise, like just about everything associated with the election, was a startling performance. Stocks historically have gone down the day after Election Day.

According to Jeff Hirsch, editor of the Stock Trader’s Almanac, the average decline for the S&P 500 the day after Election Day between 1932 and 2012 was 1.1%. That formula has largely held true, whether it was a Republican or Democrat winning, whether the incumbent party or president got re-elected, or if the outcome was considered an upset.

But on Nov. 9, one day after Trump’s election, the market actually rose 1.1%.

Stocks dropped 5.3% in 2008 after Barack Obama was elected, but it should be noted those were tumultuous times for the economy. They also fell 2.4% in 2012 when the recovery was starting to pick up.

In a longer-term look, the market was down one week after the election in seven of the last ten campaigns, including a record 10.8% following Obama’s first victory in 2008.

There was also some precedent for those who anticipated a Trump victory. According to Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, the stock market has correctly called the election’s outcome 10 of 11 times in the last 44 years.

When the S&P 500 rose in the three months before the election, the incumbent party prevailed in five out of six occasions. But each time it fell, including this year (down about 3% since August), a new party has claimed the White House.

Obama’s second term defied convention with stock market results. The first and second years of a president’s term have seen average gains of 2.5% and 4.2%, respectively, since 1833. Obama’s second term, beginning in 2013, posted an initial year gain of 27%, then 7.5% in year two. The third year, historically the strongest year, saw a drop of 2%, causing some analysts to wonder what kind of unpredictability was ahead for the new president.

Whether it was Hillary Clinton or Trump, there was no historically tangible difference across party lines when it came to overall stock performance. Since 1900, Democrats have been slightly better for stocks, with the Dow up an average of nearly 9% annually, compared to a 6% improvement per year during Republican administrations.

So, predicting the winning party usually does little good for those interested in investing.

Moving forward, investors hope the stock market can continue to rally as Trump and a Republican-controlled Congress unwind some of the regulations placed on financial services companies by the Obama administration.

Trump’s appointments to the Federal Reserve and the Supreme Court could also have an effect on stocks, along with his philosophies on trading with Mexico and China. Some investors fear that could damage the market and the overall economy.

Much of his relatively brief office-seeking political career has defied convention. With Trump, unpredictability is usually the rule. If the apocalyptical start leads to stock-market prosperity, why should anyone be surprised?