The recent news of Ron DeSantis dropping out of the Republican presidential race has shed light on the significance of elections on markets. This year is poised to be a significant one, with the United States, India, Mexico, and highly likely the United Kingdom heading to the polls.
In a comprehensive study, Citi strategists analyzed the stock-market impact of 134 elections across 17 different countries. It is worth noting that volatile global events such as the global financial crisis and the COVID-19 pandemic were excluded from the analysis.
One intriguing finding is that elections, historically speaking, do not have a substantial impact on equities in developed markets. While there may be some short-term volatility around election day, equities tend to maintain a mild upward trend leading into and out of elections.
The United States, in particular, witnesses a rise in equity markets in the buildup to elections, which continues even after the conclusion of the electoral process. Notably, cyclical sectors tend to perform relatively well post-election. It is important to mention that although there is an increase in volatility, as indicated by the VIX index, during election periods, it tends to subside later on.
Another fascinating discovery is that while markets generally favor continuity, they can adjust to “change” elections where significant policy shifts occur. However, this adjustment typically occurs with a lag of approximately four to five months. Right-leaning parties are preferred by markets initially; however, after this period, left-leaning parties actually tend to perform better.
Turning our attention to emerging markets, equities typically experience a decline leading into elections, followed by a subsequent rise. The markets that have elections scheduled for this year have shown mixed results. In Indonesia, Taiwan, and South Africa, markets tend to exhibit growth six months after election day. However, India and Mexico show a tendency towards slightly lower trading levels. It is evident that emerging markets tend to favor change rather than continuity candidates.
Amidst all this, the S&P 500 index has witnessed a 1% gain this year and recently reached a record high. Over the past 52 weeks, the index has experienced a commendable 22% increase.
Also read: Ron DeSantis ends presidential bid, endorses Trump ahead of New Hampshire primary
