History lesson: Markets shrug off US elections – except when they’re surprised

Deutsche Bank is out with a look at market history around elections ahead of tomorrow’s vote.

Market reactions to US elections since 2000 have been mixed – S&P 500 up in 3 cases, down in 3 by end of November
• Treasury yields fell in 4 elections, rose in 2

The key point is that markets price in expectations, so surprises matter more than outcomes.

Quick rundown of past elections from DB:

2020 (Biden): Markets rallied on divided govt hopes + Pfizer vaccine news gave extra boost
• 2016 (Trump): Biggest surprise election – Treasury yields jumped sharply as markets priced in fiscal stimulus
• 2012 (Obama): Risk-off move due to fiscal cliff fears and Greek crisis worries
• 2008 (Obama): Sharp selloff but due to GFC, not election (the result was widely expected)
• 2004 (Bush): Markets liked policy continuity, S&P 500 gained
• 2000 (Bush v Gore): Ugly month for markets as Florida recount dragged on,

I would dispute the idea that markets rallied in 2020 on divided government hopes. To me that makes no sense as the rally expanded and extended after the Georgia run-offs.

Bottom line: Historical election market moves have varied widely depending on whether result was surprising and what else was happening in the world at the time.

As for the takeaways for this election? Given the polls and the possibility of a contested result, the 2000 election is the one to think about and the fears that hit risk assets in the aftermath. From DB:

The S&P 500 fell 1.6% the
following day (November 8th), before seeing a further 0.7% and 2.4% decline on the
Thursday and Friday respectively. In fact, November 2000 was the S&P 500’s worst
monthly performance of that year, with an 8% decline from start to finish.

During that period, Treasury yields fell to 5.26% from 5.86%.

This article was written by Adam Button at www.forexlive.com.