Understanding the USA presidential election and its impact on investments.

The quadrennial US presidential election is a major political event that attracts global attention and is closely followed by the investment community.

Taking the stock market as an example, the market often speculates on concept stocks of candidates in election years. For example, if Donald Trump makes a comeback in 2024, 'Trump trade' will become one of the speculative themes throughout the year in the US stock market. After Kamala Harris became the Democratic presidential candidate, the concept of 'Harris trade' also emerged in the market.

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What are the important milestones for the upcoming election? What impact does it have on the market? This article will attempt to answer these questions.

How is the US election arranged?

Let's first understand the complete process of the US election. The election process lasts for nearly a year and is divided into six stages.

1. Primaries and nominations:

The process of the US presidential election begins with primaries and caucus meetings in each state. Most primaries are held in January and February. During the primaries, voters choose the presidential candidate they support.

The results of the primaries in some states often have a significant impact on subsequent campaign activities. For example, on January 15, 2024, Donald Trump won the Republican primary in Iowa with a clear advantage, laying the foundation for quickly attracting support within the party.

Two, National People's Congress:

After the primaries, the major parties hold national conventions to formally nominate presidential and vice presidential candidates.

For example, on August 22, 2024, the Democratic Party National Convention was held in Chicago, and Kamala Harris officially accepted the Democratic Party's presidential nomination.

Three, Presidential Candidate Debates:

Presidential candidates will participate in multiple debates between September and October before the election to showcase their policy positions and debating skills. This stage is crucial for the final sprint of the election and has a lot of variables.

The first presidential debate in 2024 broke the norm and took place on June 27. The participants were Joe Biden and Donald Trump, but Biden withdrew from the debate afterwards.

Four, Election Day:

The 2024 presidential election is scheduled for November 5th. Voters will cast their votes on Election Day to choose their preferred candidate. The results will be independently counted by each state, and the candidate who wins a particular state will automatically receive all of that state's electoral votes ("winner takes all").

For example, whoever gets the majority support from the voters in California can get all 55 electoral votes of the state.

The President of the United States is elected by the Electoral College in December. Because the electors of each state must abide by the voting results of the voters within the state, this process is essentially a formality.

There are a total of 538 electoral votes for the 50 states and Washington D.C. The number of votes varies by state. The candidate who receives more than half of the electoral votes is elected as the President of the United States.

The new President holds the inaugural ceremony on January 20th of the following year and officially takes office.

How does the election affect the market?

Many investors want to know: What impact does the election have on the market? Let's take a look from the perspectives of timing patterns and party patterns.

1. Time Regularity

The election may affect monthly stock performance. As the voting day of the election approaches, the general market volatility increases, leading to weaker stock performance.

According to Bank of America's statistics, it is more common for the market to decline in September and October before the election, and then rebound in November and December after the election.

However, from an annual performance perspective, the impact of elections on the stock market is not significant.

According to JPMorgan's statistics, since 1928, the average return on the S&P 500 index in election years is 7.5%, while the average return in non-election years is 8%, and there is no significant difference between the two.

The above is the situation in election years, so does the election result affect the subsequent market trend? We need to analyze it in conjunction with the results of congressional elections during the same period.

2. Party Regularity

The following chart shows the average annual return of the S&P 500 index under different combinations of parties in the presidency, Senate, and House of Representatives.

It can be seen that regardless of which party's candidate is elected president, the market average tends to rise, as the US stock market itself has a long-term upward trend. Therefore, investors don't need to worry about who will be in power.

However, the results of congressional elections may have some impact on the market, as the control of both houses of Congress can influence the implementation of the next government's policies. Data shows that when the Democratic Party controls both houses, regardless of the party affiliation of the president, the average annual return of the S&P 500 index is lower than in other years.

How did major industries perform in election years?

Although the presidential election does not have a significant impact on the overall medium to long-term performance of the stock market from the above two perspectives, it can have a positive or negative impact on specific industry sectors.

This is because presidential candidates often have clear positions and tendencies towards certain industries, and the market reacts to this through trading, resulting in higher price volatility. For example:

Energy: Both parties have different attitudes towards fossil fuels and renewable energy, making this area easily affected by elections.

Medical: Both parties have significant differences in healthcare policies, and candidates' debates on healthcare policies can cause significant volatility in the healthcare industry's stock prices.

The chart below shows the performance of major industry sectors in election years since 1976.

What conclusion can we draw from the statistical results?

First, energy and communications services outperformed the S&P 500 index in most election years, while medical care, materials, and technology underperformed.

Second, it seems that the winning party in the presidential election has relatively little impact on industry returns. Regardless of which party wins the presidency, those that should outperform will still outperform, and those that should underperform will still underperform.

For example, energy outperformed in 5 Republican election years and 3 Democratic election years, while medical care underperformed in 5 Republican election years and 4 Democratic election years.

Written at the end.

The above analysis is based on historical data to summarize the overall situation, but history does not always repeat itself, and this election is also full of variables and surprises. We should dynamically assess the impact of the election on the market.

If you want to know which industry sectors may benefit or suffer from this election, you can refer to our interpretation courses on "Trump trades" and "Biden trades".

Finally, I would like to remind everyone that the impact of the election on the market and industry sectors is usually short-lived, and ultimately the stock prices will depend on the changes in the new government's policies on the economy and corporate profits.