According to the theory of presidential election cycle, when the stock market rises from July 31 to October 31, the ruling party tends to win the election. When the market plummets, the opposition will win.
recently, Biden announced that U.S. Senator Kamala Harris (Chinese Name: he Jinli) is his presidential running mate, that is, vice presidential candidate. It’s a good opportunity for investors to start thinking about how much the coming election will affect the market. After all, the election is less than three months away. Although Biden’s proposal is not as radical as Bernie Sanders or Elizabeth Warren, the Biden administration is likely to bring about significant policy changes that will affect investors.
the three months before the election are crucial. Frank Holmes, chief executive of U.S. global investors, points out that according to the theory of presidential election cycle, when the stock market rises from July 31 to October 31, the ruling party tends to win the election. When the market plummets, the opposition will win.
take the 2016 general election as an example. The polls strongly supported Hillary Clinton, then the ruling party candidate, but the market showed different performances. In the three months before election day, the S & P 500 fell 1.7%. In the end, trump, the opposition candidate, won the White House.
since World War II, the accuracy of this rule has been 72%. In other words, investors can accurately “vote” for the winning candidate about three times every four times. If the 2000 election is excluded, the accuracy rate will rise to 78%, or four fifths.
first, although Holmes labeled the 0.18% increase of the S & P 500 index in three months as a rise, it could only be called flat in practice. Second, the election is controversial. Although Bush lost the general election, he won the electoral college vote and won the election by the weakest margin in American history.
so, according to the performance of the market, how about Trump’s re-election success rate so far? As of August 12, the market has risen more than 3% since July 31, close to a record high. According to this trend theory, this means that so far the market expects trump to win the election.
However, Holmes decided to go further and see if the market’s outstanding performance depends on whether the incumbent president is running for re-election or whether a new president needs to be elected.
as shown in the figure below, when the incumbent President Seeks re-election, the S & P 500 index performs better in that election year than in a completely different era for the next president. The average rate of return in the years in which the incumbent president is running for re-election is 7.84%, while the average in other election years is less than half of the former.
this should not be surprising. Because when the incumbent President Seeks re-election, he is more likely to introduce more policies to boost economic growth, promote employment and boost the stock market. Trump, for example, signed a memorandum last weekend to issue an executive order to temporarily extend federal unemployment benefits.
in theory, the most important thing is still policy. Holmes believes that no matter which party is in the White House, investors always have a way to make money. If Biden is elected to control Congress, that could be good news for many industries, including renewable energy, public transportation and healthcare stocks.
on the other hand, if trump was re elected, it would have been good for fossil fuels. However, it was the worst performing sector since he was sworn in. This is not entirely attributable to the epidemic. In fact, from 2017 to January 2020, the S & P 500 energy index fell by 26%, the only sector unable to achieve positive returns.
if Biden is elected president, it is reasonable to expect that taxes will rise and regulation will become more stringent. Biden supported an increase in corporate tax from the current 21% to 28% and a doubling of capital gains tax on entities earning more than $1 million a year, from 20% to a staggering 39.6%. One strategy that many wealthy investors may take is to sell shares now and pay taxes at the current rate, rather than paying nearly 40% of the tax when they sell later, says Holmes.