By Dr. Sonu Varghese via

With the presidential election on Tuesday, and media narratives shifting with each poll that is released, we thought it may be good time to look back at the previous sixteen presidential elections and see how equity markets behaved around them.

Equity markets are clearly jittery, though it is hard to reconcile correlation and causation amid news from the presidential race and perhaps more importantly, a Federal Reserve that seems poised to hike interest rates once again before the year is out.

In this post we look at how equity markets behaved around presidential elections. 

Note that we have data only for the past sixteen presidential elections, which is a really small sample from which to make many conclusions. More so because each presidential year has its own idiosyncratic characteristics, starting with the candidates themselves, the economic situation or other forces (war, etc). Nevertheless, we do believe it useful to do this exercise by treating it more like an event study. As Noah Smith points out, event studies don’t predict markets and shouldn’t be treated as if they do. The goal here is not to find a market-beating forecast, but to study the behavior of markets around presidential elections, and whether or not the election had any discernible impact on equity markets.

We start by looking at equity markets around election day and whether returns in the month after are higher than the month before. One would think that the month prior to election day would be a period of high uncertainty, which should reduce after election day (unless you get a contested result like in 2000).

The table below shows returns for the S&P 500 price index (excluding dividends) in the month prior to and post election day. The table lists each of the past sixteen presidential elections, along with the President elect and whether or not they were an incumbent.

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