Four Major Historical Lessons from Trading the U.S. Presidential Election

As the U.S. presidential election on November 5 approaches, the market is beginning to focus on the potential impact of the election on trade and fiscal policies.

On October 28, Deutsche Bank analyst Henry Allen proposed four lessons on trading the U.S. election by analyzing market conditions before and after past elections.

The analysis suggests that the market performance after the unexpected election of Donald Trump in 2016 will not be repeated. The U.S. stock market may face challenges due to a disputed election result, and if the new president cannot control either house of Congress, it will affect the implementation of future agendas. In addition, polling errors have a domino effect and may not be accurate.

The unexpected victory of Trump in 2016 poses risks for over-reliance on market strategies that year

Deutsche Bank believes that one reason for the strong market reaction in 2016 was the significant impact of Trump's victory. At that time, FiveThirtyEight's final poll forecasted him with only a 28% chance of winning, and state polls in battleground states such as Wisconsin, Michigan, and Pennsylvania all pointed to Hillary. However, Trump unexpectedly won in the end.

In contrast, the situation in 2024 is different. Currently, FiveThirtyEight's forecast shows Trump has a 54% chance of winning, and the average betting market provided by RealClearPolitics also indicates a 61% chance of Trump winning the election.

Analysis points out that although the market was very concerned about the reaction and outcome in 2016, the market response at that time was just a response to the unexpected result. Given the prevailing uncertainty, the market will have some reaction to the election results this year, but it will not be as "strong" as it was back then.

Historically disputed election results will prolong uncertainty, posing challenges for the U.S. stock market

Deutsche Bank notes that in the elections of 2000 and 1876, the election results remained in doubt for a long time after election day. The winners of these two elections were not determined for over a month after election day. However, today, this situation only requires winning a decisive state by a narrow margin.

In 2000, Bush won by a tiny margin of 0.009%. In the uncertainty, the S&P 500 index fell by 1.6% the next day (November 8), and then further declined by 0.7% and 2.4% on Thursday and Friday, respectively. Also, November 2000 was the worst-performing month for the S&P 500 index that year, falling by 8% from the beginning to the end of the month.

The dispute in 1876 was even greater, with the winner not determined for several months after election day. There were 20 disputed electoral votes, and Congress eventually established an electoral commission of 15 members to resolve the election issue. As with the 2000 election, as the election dispute continued, the stock market also experienced a declineHowever, Deutsche Bank also pointed out that it is difficult to determine whether this is due to the controversial election, as the 1876 election happened to occur during the so-called "Long Depression of 1873-79", but these precedents are worth noting.

If the new president cannot control either house of Congress, it will affect the implementation of the agenda

Since Clinton, every new president's term has started with their party controlling both houses of Congress, usually losing control midway through their term, but they have had control at the beginning, thus having the ability to implement their legislative agenda.

This is also a key issue surrounding fiscal policy, including spending bills (the absence of which could lead to a government shutdown), or raising the debt ceiling, all of which require legislation. Appointing cabinet members, Supreme Court justices, and the Fed chair also require majority votes in the Senate.

Analysts also point out that in a divided government, this gives the other party veto power over important policy areas, potentially preventing the president from implementing legislative plans, and also increases the likelihood of disputes over issues such as the debt ceiling.

In the prediction market, a divided government has been considered a plausible event. On the Polymarket prediction market website, in two "sweep" scenarios, the probability of one party winning the presidency, Senate, and House of Representatives is currently around 60%. In other words, the prediction market believes that the likelihood of a unified government is high, but not inevitable.

Polling errors are interconnected

Deutsche Bank points out that recent elections have shown that polling errors are often interrelated, so if one side is underestimated in a swing state, the same error may also occur in other states and in the battle for Congress.

In 2016, in the swing states of the Midwest where Trump won by a narrow margin, polls underestimated Trump's chances, the same situation occurred in Pennsylvania, Michigan, and Wisconsin. The Senate was also the same, with the Republicans outperforming expectations that year, ultimately winning by a 52-48 majority.

In 2020, polls also underestimated Trump and the Republicans, although those margins were not enough for Trump to win. In the House of Representatives, due to the Democrats' performance falling below expectations, they only won 222 seats. Therefore, polling errors reappeared, with one side outperforming expectations in multiple areas