The Impact of Stock Trading and National Elections

For some of us, we might struggle to understand everything about stock trading and national elections, as well as how they affect us globally. But what happens when a national election does occur, and how does that affect other countries and their stock markets? 

We are experiencing a great deal of political and economic instability for a wide variety of reasons both domestically and internationally: the Russia-Ukraine conflict, President Joe Biden’s policy changes, climate change, and the aftermath of the COVID-19 pandemic to name a few. 

Read on as we delve deeper into why politics, especially that of the United States, affects the global economy in terms of the stock market and stock trading. 

What is Stock Trading? 

The stock market is a broad term for the arrangements where buyers and sellers exchange publicly held company stocks and shares. Stock trading, therefore, refers to the purchase and sale of listed companies, effectively making buyers an owner of a small piece of the company. 

In general, the aim is to buy low and sell high. The busy lives of stock brokers are spent following the short-term fluctuations in the price of stocks to try and maximize the profits of these trades. 

This is not the same as day trading where even the smallest increases and decreases are acted on to try and turn a profit. All stock trading inherently carries some risk but day trading is especially dangerous. 

Why Do National Elections Affect Stock Prices? 

As much as we may like to think that the world or even the US stock markets are free markets, this is almost impossible in practice. Instead, the mixed economies of developed countries are usually under the influence of a central authoritative body in some form or another. 

Any policy that this central authority, usually the country’s federal government, passes can therefore have a direct effect on the stock market. These policies can be anything from taxes and tariffs to regulating fair trade. 

So if the federal government controls the market and economy to some degree, national elections will naturally have an effect on stocks as well. This is primarily because of how the public and businesses predict what a presidential candidate will enact. 

Typically, conservative parties like the Republicans act in many business favours by lowering taxation to stimulate the economy while liberal ideals like those of Democrats can end up creating an economic downturn in favour of the social change. 

How Much Are Stocks Affected By National Elections? 

The Presidential elections held every four years can have a significant impact on stocks and the returns on investment. 

According to US Bank gains on stocks and other equities in any 12-month period are about 8.5%. In the year preceding a national election, gains average out to less than 6%. 

Which party ends up taking office doesn’t tend to make a great difference since there is always some lower performance and return by the stock market. However, there are some important consequences should all three of the main governing bodies (at least in terms of the United States government) be won by a single party. 

If one party, say the Republican party, were to get a substantial victory in the House and Senate Congress as well as winning the White House, then there would be a consensus on what policies should be enacted. This leads to short-term volatility in the market as businesses react to maintain their position in accordance with the new legislature. 

On the other hand, if there is a mixed or divided government, then none of the governing parties gain an upper hand and the policy-making process is usually stopped in a gridlock. While this sounds like a negative thing, it is generally beneficial for the market for the next few years. 

Some private investors take advantage of some economic principles by simply holding onto all of their bought stocks for a very long time. By ignoring the short-term ups and downs of the daily stock market, the thought is that all stocks will eventually “return to the mean” if held onto for long enough. This effectively negates any effect that national elections might have on a stock until the stock is sold. 

Are Bond Markets Also Affected By National Elections? 

Equity comes in many forms with greatly varying amounts of profit and risk associated with each. Bonds and the bond market are another set of examples of how the economy responds to national elections. 

Unlike stock markets which can be highly profitable yet equally volatile, bond markets carry much less risk and will produce lower profits. While they are still affected by the results of a national election, the extent of the effect is much reduced in comparison. 

Stock markets on average lose at least 2.5% between a normal 12-month fiscal period and the year of an election. This may not seem like much but the ramifications of these losses are greater on individual investors than on big corporations. Even those that don’t have any investments can experience the effects of these downturns through phenomena like inflation. 

Over the same 12-month period, a bond may only experience a 1% loss, falling from 7.5% to 6.5%. In fact, after an election, bonds can marginally outperform themselves and even stocks. 

Do State And Local Elections Affect Stock Markets? 

While it is possible that more localized elections can have an effect on stocks one way or another, it is less likely for these elections to have a significant effect on most large companies that are held by the public. 

This is simply because today’s organizations are often widespread with locations, plants, offices, etc. So while a state governor might have strict policies on how business can be run in any given state, the company does not have to perform a massive overhaul of how they operate or source their products. 

They need only comply with the new legislature in that area which will generally not interfere with their bottom line.  

Stock Trading and National Elections: The Conclusion 

The principles of how national elections affect stock markets are generally the same for most foreign markets, every time elections are up stocks and other equities underperform their projected values. 

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.