Likewise, it was expected that gold prices would spike and there would be a run on the dollar. In the actual event, the Dow and dollar soared to new highs whilst gold – the traditional calamity hedge – declined. Elections have often impacted markets though not always in the way one may expect. This feature discusses the nexus between elections and markets and explores the financial ramifications of eight historical elections.

Elections and Markets

Presidential elections can affect markets in a number of ways. Incumbents may seek to massage the economy and introduce market friendly policies in the run-up to the election to foster a sense of prosperity to boost their chances of re-election. Such stimulation may result in ramped up asset prices preceding the election and a sharp correction shortly after when the stimulus is withdrawn and the proverbial piper must be paid. It is perhaps not completely insignificant that many major US panics such as 1837, 1857, 1873, 1893, 1929 and 2001 have occurred in post-election years.

Crude partisan caricatures of who would be better for the economy may also influence trading decisions. The cliché that Republicans are good for business/Wall Street and Democrats are the party of labour has been off the mark for a long time but still persists. It has been well documented that equity holders have enjoyed excess returns under Democratic presidents, indicating that investors have systematically under-priced Democratic policies that have benefitted stocks. The instinctive preference of equity holders for Republican presidents is illustrated in Fig 2, which shows the tendency for stocks to surge upon Republican victories and decline upon Democratic victories. This is particularly the case for shock wins such as Truman’s in 1948 and Trump’s in 2016. However, such investors may be wise to reflect that the Dow Jones Industrial Average tripled under the Democratic presidencies of FDR and Bill Clinton, whilst the Republican presidents Hoover, Reagan and G.W. Bush presided over precipitous declines.

Stock returns during elections

Everything candidates say or don’t say is scrutinised for clues as to their likely impact on specific assets. The feeling that Hillary Clinton would threaten gun rights boosted gun stocks in the run up to the election as anxious citizens sought to arm themselves before it was too late. Conversely, when Clinton tweeted her disdain for Turing Pharmaceuticals’ decision to raise the price of its HIV treatment from $13.50 to $700 per pill, NASDAQ’s Biotech Index fell 4.4% on the same day. Meanwhile, Trump’s support for fossil fuels and US energy independence gave domestic oil and gas producers a boost whilst his excoriation of Mexican immigration and cheap imports weighed heavily on the Peso. Indeed the USD-MXN came to be seen as a key barometer for Trump’s chances of being elected.

Above all else, investors crave predictability. Consequently, markets perform better when incumbent presidents and parties are re-elected since they represent continuity. Since 1900, when parties retain White House, the Dow Jones Industrial Average has gained 15.3% in the average election year but lost 4.4% when incumbents were ousted. Departing two-term presidents by contrast create a void that markets may find unsettling. A close contest between two radically opposed platforms may also create uncertainty as to the outcome. Facing such uncertainty, investors and businesses may make irrational choices and delay their decisions until after the election. This is hinted at in Fig 3 which shows that stock returns prior to marginal victories have typically been weaker than those before convincing wins.

Stock returns vs. margin of victory

No matter how compelling these theoretical relationships, one shouldn’t attribute too much significance to presidential elections. Fundamental factors such as interest rates, corporate earnings and exogenous shocks such as wars and natural disasters often influence markets to a greater extent during the electoral cycle than the election. Moreover, elections are often influenced by economic and market conditions rather than the other way around, such that poor market performance may harm an incumbent’s re-election prospects whilst boosting those of an outsider promising change. The parlous state of the economy cast a shadow over the re-election campaigns of Jimmy Carter and George H.W. Bush, summed up by Bill Clinton’s campaign slogan “It’s the economy, stupid!”.

Winton doesn’t invest on the basis of extrapolated election outcomes but nevertheless exploits the psychological behaviour associated with ‘scares’ and post-election ‘honeymoons’, allowing it to gain from unexpected phenomena such as the Trump rally.

1884 – Blaine (R) vs Cleveland (D)

Wall Street’s bulls bought heavily on the Republicans’ success in the Ohio state elections in mid-1884, assuming that their pet candidate James Blaine would win the presidential election. His venal connections to several railroads led many investors to believe that he would vigorously defend their interests. This belief was somewhat misplaced given that favourable legislation would only apply to the government-backed Union Pacific and in any case could not be ratified by Congress for a year. Outside Wall Street and the railroad boardrooms, he was less popular. There were mass demonstrations in the financial district of New York, denouncing Blaine as a tool of moneyed interests, with chants such as “Blaine, Blaine, James G Blaine, The continental liar from the State of Maine.” The Republicans in turn, accused Cleveland of fathering an illegitimate child with a woman he had then sent to a lunatic asylum – a charge which Cleveland admitted. Cleveland won by a very slender margin causing railroad stocks to break.

1896 – McKinley (R) vs Bryan (D)

The nomination of William Jennings Bryan as Democratic candidate in early July 1896 sent financial markets into a tizzy. Bryan was regarded as a menace by Wall Street. He styled himself as the Great Commoner, representing the interests of American’s rural heartland against the “great combinations of money grabbers”. Most notably, he led the crusade against the monometallic gold standard, demanding the free coinage of silver at a ratio of 15:1 with gold, as a means of inflating prices for America’s farmers. “You shall not crucify mankind upon a cross of gold” he thundered at the Democratic Convention in July. He railed against “the idle holders of idle capital” and exhorted his followers to “Raise less corn and more Hell.” But others remembered him less fondly: “He liked people who sweated freely and were not debauched by the refinements of the toilet.” He was a shameless rabble-rouser in the estimation of conservatives: “He descended to demagoguery so dreadful that his associates…blushed.”

Figure 5. Puck cartoon lampooning Bryan’s “Cross of Gold Speech”.

Fearful that his signature policy of a bimetallism would wreck the currency and erode the real value of their investments, investors lined up at the Sub-Treasury windows to exchange paper notes for gold and sold dollars for pound sterling while stock and bond prices dove. On the day before the election, call money yields surged to 96%. So when he lost to William McKinley on 3 November, investors sighed with relief – stocks surged and call money rates descended to their previous levels. Although McKinley scored a significant margin – 271-176 (or 7m vs 6.5m in the popular vote), his victory had by no means been certain from the perspective of investors. With the benefit of hindsight we can see that despite Bryan’s silver tongued oratory, bimetallism was not a winning ticket – it was seen as a new-fangled oddity that divided opinion even within his own party. Moreover, famines in Europe and India served to boost demand for US grain exports just before the election, showing that wheat prices could still rise under the existing gold standard. Also discoveries in Klondike, South Africa and Australia were boosting the amount of gold in circulation and already delivering the inflation that bimetallism was supposed achieve, satisfying both the gold bugs and inflationists.

Dow Jones and call money rates (May - Dec 1896)

1908 – Taft (R) vs Bryan (D)

When Bryan was nominated by the Democrats for a third time in July 1908, markets responded with equanimity. He was still regarded as a threat by Wall Street, this time for his pledge to crack down on monopolies such as Standard Oil, but investors were confident that the Republicans’ uncontroversial (if remarkably rotund) candidate, William Taft, would win. New York’s Curb Exchange betting markets predicted odds of 10 to 1 in favour of Taft from the outset, and betting volume was at a record low of $9m (2017 dollars) – a far cry from the $217m bet in the nail-bitingly close contest of 1916. But that complacency was shattered in mid-September. When Maine’s election results showed a lower-than-expected Republican plurality, investors feared that Bryan might actually succeed. As the claim of East Coast isolation from the heartland, so much a feature of the 1896 election, resurfaced, the Dow plummeted to a low of 56 on 22 September – 9% down from August’s close. As was the case in 1896, stocks rallied appreciably upon Bryan’s defeat on 3 November.

1928 – Hoover (R) vs Al Smith (D)

Herbert Hoover was more critical of the 1920s bull-run than President Coolidge, accusing Fed Chairman Benjamin Strong of “crimes far worse than murder” for his loose credit policies. Nevertheless, investors rejoiced his victory in the 6 November election, unleashing “the greatest concentrated public buying of stocks in US history” the next day according to the Magazine of Wall Street. The NYSE traded close to 7 million shares. The Dow soared from 257 on the day before the election to 295 on 28 November, “in defiance of high money rates, cautioning remarks from high authorities in the financial and banking field, and the scepticism of professional traders”

1932 – Hoover (R) vs FDR (D)

Contrary to expectations, the dominant issues in the race did not centre on Wall Street. As Smith was anti-prohibition, his supporters were dismissed by Republicans as “damnable whiskey politicians the bootleggers, crooks, pimps and businessmen who deal with them.” Meanwhile, Democrats characterised Hoover’s allies as “sorry betrayers of intelligence who, like Hoover…flatter and fawn over the hookworm carriers [i.e. the hopelessly uneducable] in order to further their own careers.” Shunning Smith as a Catholic, Republicans warned “If you vote for Al Smith, you’re voting against Christ and you’ll be damned.” Democrats responded by circulating a faked photo of Hoover dancing with a black Republican leader Mary Booze, and claimed he had interrupted his work as chairman of the Special Mississippi Flood Relief Commission in 1927 to visit prostitutes.

Contrary to what may been expected, investor sentiment in October 1932 - in the nadir of the Great Depression - was far from bearish. Business prospects were mainly upbeat and the renegotiation of German war debt three months earlier had fuelled an equity boom. The only fly in the ointment was the growing realisation that the incumbent President Hoover would probably lose to the Democratic nominee Franklin D. Roosevelt.

Essentially Roosevelt was an unknown quantity. There were fears that his campaign promise to provide jobs for all the unemployed would lead to socialism and reckless government spending. “The grass will grow in the streets of a hundred cities” warned Hoover. However, others were incredulous, feeling that despite his namesake, Roosevelt didn’t “have enough oxen to pull the legislative covered wagon out of the mire”. And when he was elected, stocks continued to rise for a few days before plateauing.

As the 4 March inauguration approached, however, there were growing concerns that Roosevelt would tinker with the currency – reducing the gold value of the dollar and unleashing inflation. Frightened Americans moved capital abroad and into gold, with heavy gold coin withdrawals in the days before the inauguration. On 8 March, FDR solemnly declared that the gold standard was sacrosanct. Yet the very next day, he pushed the Emergency Banking Act through Congress, permitting him to ban the export and hoarding of gold and allowing the Treasury to confiscate all privately held gold bullion and coin. Far from throwing society into chaos – as one might expect - the public and investors responded favourably. They saw the Act as a strictly temporary measure, aimed at confidence to the stricken banking system. It did not cross their minds that the measure would remain in force for nearly 40 years. The stock market registered its approval. When NYSE resumed trading on 15 March after the extended bank holiday, the DJIA jumped 15% - the largest one-day gain ever. Likewise, call money rates fell and commodity prices, particularly cotton, rose steeply.

FDR received wide-ranging powers on 18 April that allowed him to reduce the gold content of the dollar to between 50-60% below the level of $20.67/oz that had been established in 1837. Further legislation abrogated gold payment clauses in all contracts. The run on the dollar resumed, with Hoover writing that abandoning the convertible gold standard was the first step to “communism, fascism, socialism, statism, planned economy.” However, despite some anticipatory fears, the stock market responded well to these radical steps and although the depression would drag on for several more years, things looked bright in 1933.

1948 – Dewey (R) vs Truman (D)

Harry Truman’s victory against Thomas Dewey in the 1948 election was one of the greatest upsets in recent US history. In the weeks leading up to the election, virtually every poll and betting market showed Dewey was on course for a landslide victory against the beleaguered incumbent. On the eve of the election, the New York Curb Exchange betting market indicated an 88.9% likelihood that Dewey would win, whilst Gallup polls predicted a 52.7% likelihood. And because Dewey was Wall Street’s candidate, stocks rallied. So confident was the press that the Chicago Daily Tribune ran with the headline “Dewey defeats Truman”. But to everybody’s great surprise (including his own), Truman won and the Democrats took control of both the Senate and the House of Representatives. The S&P 500 fell by more than 10% over the next two weeks.

Dow Jones (Oct - Dec 1948)

1960 – Nixon (R) vs Kennedy (D)

On 25 Oct 1960, the growing realisation that liberal John F Kennedy was likely to beat Richard Nixon caused the London gold price to jump to $40/oz – a significant departure from the official Bretton Woods price of $35.20/oz. Investors feared that Kennedy’s commitment to fiscal expansion would ultimately result in a dollar valuation. The post-war Bretton Woods agreement rested on the assumption that the dollar was as good as gold, but increasing overseas spending and investments and the deteriorating trade balance led to gold outflows. If all foreigners wanted to convert their dollars, US gold reserves would not cope. Speculators bet that they could trade back gold for more dollars after devaluation had taken place. Right after his inauguration, Kennedy prioritised the dollar problem, spearheading the creation of a consortium of eight central banks known as the London Gold Pool to stabilise prices between $35.00-35.20/oz.

Dow Jones and LME gold (Oct - Dec 1960)

Kennedy’s electioneering also impinged upon stocks. Businesses supported Nixon, fearing that Kennedy would lead an anti-business crusade. Their concerns were not entirely unsubstantiated – Kennedy’s proposals for doubling growth without causing inflation involved forcing businesses to hold down their prices. After reaching new highs during the campaign when it seemed that Nixon would win, the DJIA slid to 564 shortly before the election. The shift in attitudes seems to be Kennedy’s convincing performance in the presidential debates, when the youthful senator cut a favourable contrast to the pale, sickly and sweaty looking incumbent. Yet prices rose when Kennedy won as investors reasoned that the incoming Democratic administration would spend more and not control inflation. The DJIA reached 616 by the end of the year.

Figure 13. Kennedy’s “New Frontier” campaign raised fears of profligacy.

1980 – Reagan (R) vs Carter (D)

After a decade of inflation, stock market tumult and ineffective political leadership, investors were desperate to seize on any glimmer of hope. The presidential victory of Ronald Reagan promised just that and was greeted rapturously by Wall Street. Although widely dismissed as an inexperienced and naïve outsider, the former actor extolled the virtues of the free market and pledged to slash corporate tax and red tape. The Republicans’ platform of energy independence and tax incentives for savers, investors and corporations, guaranteed the pocketbook vote. Reagan’s prospects were thought to be uncertain, but his stellar performance during the third debate on 28 October when he famously turned to the cameras and asked the nation, “Are you better off than you were four years ago” turned the tide in his favour.

Dow Jones and New York gold (Oct - Dec 1980)

The news that the Republicans had scored the hat-trick of the presidency, senate and congress control, caused stocks to surge, with the Dow breaching 1000 for the first time. 4 November, the day after the election, was the busiest trading day ever. Defence stocks did particularly well, given Reagan’s strident rhetoric about the need to face down the USSR. By the same token, gold rose but then settled as traders reasoned that Reagan was a fiscal conservative who’d aim to curb inflation. The dollar was propelled to new heights. By 1 December, however the jubilance was replaced by concerns over rising interest rates and inflation.