Presidential elections are regarded highly in every nation since they have a major impact on the stock market. This explains why projections were found everywhere, for example, in the US 2016 highly-contested presidential elections, which was a tense season for an investor in the stock market at that time. The debate was very important because it was presumed to have the power to affect people’s investment portfolio on the stock.
In spite of the fears, some experts in this industry explored a different line of thought. They opposed the more conventional scientific strategies such as the common strategies. These investors advocated other protective approaches in 2016 due to volatility of the market. This is purely a risk management strategy approach widely known as ‘protective collar’ that uses index options to try to hedge or cushion a portfolio against possible loss.
The key ideologies proposed in last year’s (2016) presidential elections incorporated respective key party affiliations (Republicans or Democratic) of the presidential candidates in relation to stock market trend. As much as the collar strategy is in place and is widely used as a means to risk mitigation among investors, there is a lot of information from years of cumulative studies and data collections that we cannot afford to disregard entirely. Hence this can be documented as a complementary approach to the conventional means.
4- year Election cycle impact on Stock market
Studies show that over the past 182 years, the behavior of stock market has been oscillating over the 4-year election cycle. According to Stock Trader’s Almanac, the cycle is usually divided into 2 halves with first half of the term characterized by market recession, wars, and bear markets. The last 2 years in a political term consists of bull markets and good performance of the stock portfolio.
This proposal is however not without exceptions because during President Obama’s 1st year of his second term in white house, there was a remarkable change in the Dow up by 27% and 7.5% in 2nd year respectively. To a potential investor, this market trend was very crucial. With the strategy as a sure buffer, you could easily stay afloat with your investments.
Prevailing or political team in power
When it comes to US Presidential elections, there are several ideologies and expectations on the stock market based on whether it is the republicans or democrat taking up power. Ideally, it is expected that republics are more business-friendly as compared to democrats and hence many investors would expect their portfolios to perform better during republican regime. However, it may come as a shock to you that stocks have actually performed better with Democrats in the white house as a study shows. On average, the democrats easily raise the performance by about 9% as compared to republicans in office tailing at 6%.
In 2016 prior to presidential elections, Russ Koesterich refuted the proposal of presidential elections impacting the stock market in totality. Instead, he argued that this may have an effect on various sectors of the economy based on various candidates’ agendas. In his presentation, he insinuated that conventional methods such as the strategy may have more accuracy when it comes to risk mitigation.
Stock Market performance 3 months to elections
Interestingly, the performance of the stock market around 3 months prior to the US elections has been cited to predict the presidential results. This is according to study that the incumbent party is most likely to win the race to white house if you see the stock market booming in this period. However, this trend was broken in presidential elections of 1956, 1968, and 1980 questioning its accuracy.
It is evident that these scenarios as rounded up by cumulative date over time and may not be as accurate as convention strategies. However, it helps to keep alert to grasp as much insight as possible around the US elections to ensure that the presidential elections do not adversely affect your stock market portfolio.
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