By Megan Rule | Staff Writer
The stock market likes to stick to the status quo, which is hard to do when election years roll around, according to both Dr. Shane Underwood, associate professor of finance and the Lacy Chair of Banking and Finance, and John Riley, chief strategist at Cornerstone Investment Services. Tuesday night’s election proved this statement to be true.
“In general, when one party is handing off to the same party, the market is happy regardless of who the person is,” Riley said. “The stock market doesn’t want to see change.”
When Ohio was declared a victory for Trump, the S&P future markets started a decline that would keep dropping as the night went on. With each swing state that came in red, the markets dropped even more. At one point, the stock market was down 800 points.
Underwood said typically with election years, the market incorporates the news as it comes. In years where the incumbent isn’t running for re-election, the market doesn’t react unless there’s a surprise. This year brought that surprise. As Riley said, the market doesn’t know what to do.
“There’s a wildcard especially this year,” Underwood said. “From my perspective, we sort of know what we’re getting with candidates, and at the end of the day, the market really likes less uncertainty, which we’re seeing play out right now.”
Wednesday afternoon, the market ended up 256.95 points, about 1.4 percent, and the S&P was up 23.7 points, 1.11 percent. Once Trump gave his victory speech, the markets started rising again.
According to the Wall Street Journal, investors were “snapping up stocks and selling bonds in a bet that the Republican’s plans for fiscal stimulus will succeed in breaking the U.S. out of a post-crisis economic funk.”
The markets have reflected this pattern throughout the election season.
“Even if participants in the market aren’t crazy about some of Clinton’s proposals, the market knows what to expect,” Underwood said. “As the probability of a Trump presidency started to go up, the markets haven’t done as well. I don’t think we can necessarily draw a line between those two things, but there’s a lot to be said for the uncertainty about his policies.”
In terms of party effects on the market, it’s a puzzle. Kiplinger reported a statistical draw whether Republicans or Democrats have a better effect on the market. Republicans may have a slight advantage, but Underwood said Democrats have long-term had a better effect when all years are considered since the 1920s. When Republicans were in the White House, the market has been found to drop five times during election year, as compared to four times when Democrats were in office.
“Study after study will show the difference between Democrats and Republicans and will show it’s better for one way for one party,” Riley said, “but one party isn’t better or worse.”
According to Kiplinger, the market doesn’t predict who will win the presidency either. The market has been up during election year 10 times before a Republican won the nomination, and up eight times before a Democratic win. But, like the article says, “statistically, not enough to say with any confidence that a rising or declining market favors either party.”
As the market figures out the economic policies of candidates, it incorporates those policies into prices. It’s a gradual effect that doesn’t happen overnight. The stock market doesn’t want to see radical change, but this year is so up for grabs that the market has no idea what to do, Riley said.
The Wall Street Journal reported that “investors are welcoming the prospect that expansive fiscal spending under the Trump administration could bolster economic activity, push up inflation and support higher bond yields in coming years.”
Tuesday night and Wednesday’s rollercoaster stocks are just the beginning of a possible economic boost with Trump’s victory.