Going into the election, there was a lot of anxiety about what would happen to the markets. That anxiety, usually tied to retail investor sentiment, spread to several broker-dealers, which increased margin requirements ahead of the election on fears of extreme volatility wiping out values for high risk assets.
On the night of the election, futures climbed significantly before the results came to light following a day of confident trading. It’s almost as if the weeks and weeks of hand-wringing about election volatility was for nothing, and, in the end, the election had little impact on the markets at all.
The mismatch between election expectations and reality is nothing new. In 2016, many analysts warned of severe market crashes in light of a Trump upset (it is hard to remember, but at the time Trump was massively expected to lose to Hillary Clinton). That did not happen–and that should not have surprised anyone, because election results really have no impact on stock market returns over the long haul, and election results have rarely caused stock markets to fall in the immediate hours and days after the election. The few times there’s been a correlation between the two, such as in 2000 and 2008, there’s been little causation, as those crashes were the result of economic problems entirely unrelated to and predating those election results.
The data is useful at times like this, and CNBC has run through some of this broader data in a helpful piece. Since U.S. equities tend to go up over time, it is no surprise that regardless of congressional, presidential, and senate leadership, stocks go up; the best performance was during a split congress and Democratic president (13.6% annualized returns), while the worst was a Republican president and Democratic congress (4.9%). And if you are going to conclude that Democratic leadership leads to superior returns, note that a Republican president and Congress showed 12.9% annualized returns. And, again, if you are going to argue that Republican leadership leads to superior returns, you need to reckon with the 13% and 13.6% returns of Democratic leadership.
In short, there’s no consistency in the data; unless you have a strong political bias that urges you to one conclusion or another, you cannot conclude from the data itself that one election outcome is better for markets than the other.
And this should surprise no one.
While it is true that politics shapes the rules of the game, the dynamics of markets themselves and the companies within those markets operate much more according to factors that, frankly, are out of the control of politicians. Things such as technological innovation, geopolitical relationships, and market access are much more important to stock market returns. While politicians can nudge these forces in one direction or another, their power is very limited. And often, as we’ve seen for much of recent American history, political partisanship and stymied political processes have caused political pressure to be less influential on markets.
In short, it seems quite clear that the election would not have a significant impact on markets before the election began. So why was there so much protection against volatility, even at the professional broker level? A combination of risk aversion and insuring against the worst can, arguably, make sure that the worst does not happen; perhaps the brokers were sending a signal to the market that they were preparing for a big wave of volatility, so that they could stop that volatility from happening.
And still, it isn’t entirely over yet. We still have days and days of market reactions to the election to observe. Maybe that wave of volatility might still come.