What Markets Get Right (and Wrong) About Campaigns

It happens every year: a political race heats up, and investors become obsessed with how it’s playing in the equity market. In the U.S., that means that when a Republican pulls ahead, there will be voices saying that must be good for stocks. Sudden losses in a marquee industry like banks send analysts scrambling to find the policy or campaign pledge to blame. But while it makes for lively dinner conversation, it’s wise to take everything in this realm with a grain of salt. Simply put, the market’s knee-jerk reactions to political news are notoriously volatile and often wrong. And in the end it’s never clear if politics is influencing stocks, stocks are influencing politics or if everything is getting pushed around by something else entirely.

Looking at the reaction to Barack Obama’s first election, his re-election, and Donald Trump’s defeat of Hillary Clinton, it’s hard to call it omniscient. Each of those victories was met with panic by traders. The S&P 500 fell 5.3% on Nov. 5, 2008, and 2.4% on Nov. 7, 2012, after Obama’s wins. When it became clear Trump would prevail four years later, index futures tumbled the maximum allowed by exchanges in a matter of minutes. And each time, the initial direction was dead wrong. Under Obama and Trump, a bull market has added $28 trillion to equity values.