The macro event of the year is here! How to trade the US election?

Meanwhile, 2024 offers traders one opportunity after another. But perhaps the biggest one is yet to come. After 4 years, the US presidential election is coming up again. This year will be one of the most divisive in US history. The impact on the markets could be huge. A few weeks before the election, the chances of both candidates are evenly balanced.

In today's article we will therefore look at the historical statistics of the presidential election and the effect the election has had on the markets. Join us in preparing for the key event of the year and find out how to trade it.

US Presidential Election - when to expect volatility?

The US presidential election can cause a lot of volatility, especially if there is a surprise result. This is what we have seen in the previous two elections. In the previous ones, Donald Trump was the favourite, but 4 years earlier he was beaten in all the polls by Hillary Clinton. Thus, in 2016, the election of Donald Trump as US President was very unexpected news for the markets. They did not stand for it and the initial reaction to the election results was sharp falls in risk assets such as stock indices. The situation can be seen in the chart below.
 

_{The US S&P 500 index on the daily chart and the 2016 presidential election, source: MT4}

The red vertical line indicates the day of the election. The moving averages plotted on the chart are the EMA 50 - orange line and the SMA 100 - blue line. According to the moving averages, there was a bearish signal at the time of the election and the index should be falling. This indeed happened, the index fell sharply after the market opened at midnight and the total drop was more than 100 points. However, as soon as the European session opened, the movement started to reverse in a completely unexpected way and the price finally closed above the opening price, and the next days were followed by a rise in the stock index under the influence of the expectations of the tax breaks that Donald Trump promised in the election campaign.

However, things were a little different in the 2020 election, as we can see in the next chart.
 

_{US S&P 500 index on daily chart and 2020 presidential election, source: MT4}

There was a much calmer run on the indices in this election and there was not any significantly higher volatility. In fact, one could say that the index was in an uptrend here, just as the moving averages suggested. Technical analysis worked well in this case. As you can see, the evolution of the S&P 500 index was very similar in both cases around the 2016 and 2020 elections - that is, a correction around the election date and a subsequent uptrend.

So perhaps the fact that the election was over was more important to the market and investors than which candidate won. The uncertainty around election day may be repeated this year. Then again, after the election, markets may focus on factors that drive stock prices, such as economic results, inflation, the labor market and geopolitics.

What to expect from stock indices months after the election?

Election cycle theory can answer that. According to this theory, it is usually true that within an election cycle, stock indices have their weakest performance within a 4-year period in the first year after the election. The stronger growth is then usually in the second half of the term, because the president will want to be re-elected, so he promotes policies to boost the economy.

Since 1900, the S&P 500 has risen an average of 11.5% 83% of the time in the fourth year in office. However, in the eighth year (i.e., in the case of re-election, the fourth year of the second term), the S&P 500 has declined by an average of 1.2%, while gains have been identified only 44% of the time.
 

The performance of the S&P 500 during Biden's presidency to date:

Looking at President Biden's current term, the S&P 500 gained 26.9% in 2021. In contrast, the second year of his presidency saw the index decline 19.4%, and the third year saw a stock rally, with the index rising 24.2%. The index continues to gain strongly in 2024 (as of 10/16/2024, the index has added approximately 22%).

The sharp rise in the index in the first year after Biden's election was due to the fact that at that time central banks were propping up the economy after the global coronavirus pandemic. Then, in the second year of his presidency, inflation started to rise and the Fed had to put the brakes on and started raising interest rates. Also, the war in Ukraine broke out, creating further uncertainties.

Inflation then peaked in the third year and began to slowly decline in the second half of the year. This then gave the markets some optimism that the Fed would start cutting rates again. The Fed committed to this at the September meeting and immediately with a double cut - by 50 basis points.

Inflationary developments give hope that we will see another 2x25 basis point rate cut this year. The markets are strengthening quite significantly under this influence and , in the event of a successful soft landing, may have a positive development next year as well.

We mentioned that the S&P 500 index is mostly rising in the fourth year of the mandate. The following table reveals specific details on this. It misses 2020, when the markets added over 18% despite the pandemic, and 2024, when the S&P 500 index is up 22% so far.
 

_{S&P 500 Index performance in an election year}
 

Of the 24 election years since the 1928 election, the S&P 500 Index has risen on 20 occasions. This gives an 83% probability that this phenomenon will occur again this year. It was found that when a Democratic president was in power and a Democratic candidate was elected, then the average annual return of the index was 11%. When a Democratic president was in power but a Republican candidate was elected, then the average annual return of the index was 12.9%.