Divided government and markets

How U.S. Elections Since 2000 Have Shaken the Markets

EDITOR'S NOTES

With each election since 2000, we’ve seen markets whipsaw between risk-off retreats and risk-on rallies. For investors, elections are a high-stakes event, particularly when the unexpected emerges. Below is a review of how each election impacted markets and what that reaction revealed about investor sentiment, underlying economic factors, and the influence of external shocks.

2020: Biden vs. Trump – Markets Buoyed by Vaccine Hopes and Divided Government

  • Market Reaction: S&P 500 surged as investors anticipated a divided government that would limit regulatory and tax changes.
  • Key Drivers: Initially, investors speculated that the Republicans would hold the Senate, creating a check on Democratic fiscal policies.
  • Boost from Vaccine News: The real turning point came with Pfizer’s vaccine announcement, sparking renewed optimism about an economic reopening and stronger recovery.

In 2020, markets rallied not just on the election outcome but on newfound hope for a path out of the pandemic. The vaccine news intensified the risk-on sentiment, sending equities and other risk assets higher as investors saw a clearer path to normalcy.

2016: Trump vs. Clinton – A Shock Win Ignites Treasury Yields

  • Market Reaction: Treasury yields shot up as Trump’s unexpected victory paved the way for pro-growth, pro-stimulus policies.
  • Fiscal Stimulus Anticipation: Trump’s presidency, along with a Republican-controlled Congress, raised expectations for tax cuts and deregulation, particularly with the Tax Cuts and Jobs Act that followed in 2017.
  • Yield Spike: The 10-year Treasury yield rose rapidly, moving from 1.85% on election night to 2.44% by year’s end, as the market recalibrated for growth-friendly policies.

Trump’s victory sent a shockwave through the bond market, signaling that markets hadn’t priced in his win or the potential for sweeping fiscal changes. Yields rose, reflecting both optimism and the costs of expected stimulus measures.

2012: Obama vs. Romney – Fiscal Cliff Concerns Dominate

  • Market Reaction: S&P 500 fell sharply as investors worried over the looming “fiscal cliff” and European debt crises.
  • Fiscal Concerns: With Republicans holding the House, gridlock over automatic tax hikes and spending cuts threatened a potential recession.
  • Eurozone Anxiety: Global sentiment was further dampened by renewed fears in Europe, as investors awaited decisions on Greek bailout funds.

Obama’s re-election left investors wary of deadlock in Washington, with a fiscal crisis threatening the economy. Combined with the Eurozone’s debt troubles, the election underscored the influence of external economic risks on the U.S. market.

2008: Obama vs. McCain – Financial Crisis Overwhelms Election Result

  • Market Reaction: Markets plunged as the financial crisis overshadowed Obama’s widely expected victory.
  • Global Financial Crisis: Lehman Brothers had just collapsed, and economic data continued to deteriorate, with job losses and weak services index data intensifying fear.
  • Liquidity Drains and Fed Cuts: Just two weeks before the election, the Fed slashed rates to 1%, but the economy was still sliding.

The 2008 election came at the height of the financial meltdown. Any hope of a positive market reaction was crushed by the weight of systemic failures, highlighting how deep economic crises can overshadow even significant political shifts.

2004: Bush vs. Kerry – Markets React Positively to Continuity

  • Market Reaction: The S&P 500 rose as Bush’s re-election promised continuity in policies.
  • Policy Stability: Bush’s second term reassured markets that taxes and other regulatory measures would remain favorable to businesses.
  • Data Support: Strong jobless claims and ISM non-manufacturing data following the election further bolstered investor confidence.

In 2004, markets welcomed stability. With Bush in office, investors anticipated a steady policy environment, marking this as one of the more straightforward, positive reactions of recent elections.

2000: Bush vs. Gore – Uncertainty Plagues the Market for Weeks

  • Market Reaction: The S&P 500 suffered its worst monthly performance as the contested election dragged on.
  • Florida Recount: With the final result hanging on a razor-thin margin in Florida, weeks of legal battles and recounts triggered uncertainty.
  • Flight to Safety: Investors fled to Treasuries, sending 10-year yields lower as they awaited a conclusion.

The 2000 election stands as a case study in how prolonged political uncertainty can rattle markets. As the U.S. Supreme Court intervened to settle the result, markets remained volatile, with equities dropping 8% that month while bond yields fell as investors moved to safe-haven assets.

Takeaway Lessons from Election-Induced Market Volatility

Each election since 2000 has shaped markets uniquely, reflecting not only investor sentiment but also broader economic conditions and geopolitical factors at play. Here’s what we’ve learned:

  • Expect the Unexpected: Unanticipated outcomes, like Trump’s 2016 victory, can send markets scrambling to reprice risks.
  • Broader Economic Context: Elections don’t happen in isolation. The 2008 crash and the 2020 pandemic show how market reactions are often more tied to economic crises than election outcomes alone.
  • The Role of Policy: Markets tend to favor divided government or continuity when it comes to business-friendly policies, as seen in 2004 and initially in 2020.
  • Uncertainty Is Costly: Prolonged uncertainty, as in the 2000 election, triggers risk aversion and has the potential to destabilize both equities and yields.

To prepare for future market turmoil and protect your wealth, download Bill Brocius’s “7 Steps to Protect Yourself from Bank Failure” here. Plus, gain further insights with Bill’s book, The End of Banking as You Know It, or join his Inner Circle newsletter for ongoing analysis and strategies to stay ahead in volatile times.

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