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How Will The Election Affect The Markets? Do Normal Trends Apply Today?

|Includes: DIA, MXNS, QQQ, SPDR S&P 500 Trust ETF (SPY)

In a nutshell:

  • "The last week before the election" is bucking past trends
  • What usually happens right after a presidential election?
  • How does either party's win affect the market?

While voters figure out whether Clinton or Trump would make the better president, stock market observers wonder, "How will the outcome affect the markets?"

Recent Developments Buck the Trend

There are some interesting trends and unusual developments connected with this topic. Market behavior is not following the usual script this election cycle, since a rally averaging at 1.8% S&P gain typically occurs in the week before a presidential election. According to a study by Bespoke quoted in Patti Domm's Nov.3rd CNBC report, this pattern goes all the way back to 1928.

So why has the market been down lately? That's only happened two other times since 1928. If the S&P 500 is still down after next Tuesday's close, it would be only the third time (out of 23 elections!) that the market has fallen the week before the election.

"Pre-election jitters" seems to be the sentiment. Too much uncertainty. Nothing about this election process, even back to its tempestuous primaries, has been "normal." Markets don't like that because they like to know what to expect; this has been the season of the unexpected.

Could there be a post-Election Day rally?

Maybe, if the market really does have things backwards, because that has not usually been the case. Historically, the market has dropped right afterwards. Looking at the last 22 presidential elections, CNBC notes, the S&P 500 has averaged a 1% decline the week after. Since the mid-1970s, in fact, that number has tended to be closer to 2%.

Maybe looking at specific weeks is not a good idea. Stephanie T. Withers, a senior vice president at Bel Air Investment Advisors, has been focused on annual results: "The average annual return of the Dow Jones Industrial Average Index (NYSEARCA:DIA) from 1901 through September 2016 has been 4.5%," she says. In other words, presidents come and go, but the market chugs on.

Why Does It Matter Which Party Wins? (Who Knows?)

It does seem to matter which party controls the presidency. In a Nov. 1st Forbes article, Withers cites a 2015 study by Princeton economists Alan Blinder and Mark Watson analyzing 16 presidential terms of office (from the 1940s until the present). GDP growth has, on average, been 1.8% higher when Democrats hold the White House, the study found.

Withers adds: "Under Democrat[ic] presidents, the index has returned 7.0% on average, while Republican administrations have seen a 3.0% [increase]." ABC News confirms this: "In election cycles since World War II," it quotes the Stock Trader's Almanac as saying, "the Dow Jones industrials have posted bigger average returns under Democratic presidents." Why that would be is anybody's guess, and is certainly ripe for rampant speculation-but there it is.

Ned Davis Research, also quoted in the ABC News coverage, noted that average returns vary according to what year the presidency is in. The S&P 500 tended to gain just 3.4% in the post-election year, rose to 4.0% in the midterm year, and hit 11.3% and 9.5% in the pre-election and election years, respectively.

All in all, the prospects for the market are as uncertain as this election is wacky. We have lots of data telling us what should happen, historically speaking. But we just cannot know what the market, rattled by all the uncertainty, will actually do this time. Check out what investors are saying and how the elections are impacting their portfolios at Peeptrade!

Written by Ali Bakir

Co-founder & Director of Business Development at Peeptrade

Disclosure: I am/we are long SPY.