Up In The Air

Investor attention is beginning to turn to the upcoming U.S. election. More than in previous cycles, several factors make the outcome difficult to predict. The Republican presidential nomination race is wide open, with no clear front-runner and with many voters who remain undecided. The turnout for the presidential election will also impact the outcome for “down ballot” races in the House and Senate. While the House of Representatives is likely to remain in Republican control, control of the Senate could be in play, given the greater number of seats that the Republicans need to defend. We discuss how the 2016 U.S. election will potentially impact investors and markets.

For investors, the key question is, will any of this make a difference for markets? As we first discussed four years ago, while many investors connect political alignment with equity market returns, very few of these patterns hold up to scrutiny. Historically, whether a Republican or Democrat occupies the White House has had no statistically significant impact on U.S. equity markets. Another bit of myth that does not survive close inspection: markets do better under divided government. Interestingly, one political condition that does seem to matter for equity markets is the year within the election cycle. There is some evidence that markets generally perform worst during the first year of an administration and best during the third year. For investors looking ahead to 2016, historical patterns don’t suggest either a positive or negative bias.