A Lot is Riding on the Democratic Primaries. Will the Outcome Impact Stocks? Recent History Says No … with One Exception.
Democratic Primary season gets under way in Iowa today, and the outcome is very much up in the air.
Joe Biden is still viewed as the frontrunner, polling at 26.7% according to the website FiveThirtyEight. But Bernie Sanders is surging, up to 21.7% in the national polls and leading in Iowa and New Hampshire, which are important tone-setters for the primary season to come. It feels as though this hard-to-predict primary season will impact the stock market greatly. But do political primaries normally do that?
I didn’t know the answer myself, so I did some research, reviewing the behavior of the S&P 500 during the last five political primaries, dating back to 2000, when the Republicans and Democrats held primaries on the heels of Bill Clinton’s eight-year term as President. In each case, I measured from the beginning of February to the date of the last national convention (be it Republican or Democratic, if both parties were holding primaries that year), which typically occurs in July or August. Thus, there’s some variance in the length of past primaries—as short as five and a half months and as long as seven months.
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Here’s what I found:
Primary Season and the Stock Market: A History
Well, that doesn’t tell us much!
In three of the last five presidential primary seasons, the S&P 500 has posted gains; in the other two years, it fell. And there’s no difference between which party was holding primaries (in two cases, both of them were); the results seem rather random.
That said, I have several takeaways from this data. One, stocks tend to rise or fall roughly the same amount – between 3.5% and 4.5% – during the six to seven months that primary season lasts. The lone exception was four years ago, when Donald Trump won the Republican nomination and stocks spiked more than 15%.
My second takeaway is that whatever direction stocks were going heading into primary season is the same direction they tended to continue going during primary season … with one notable exception.
For example, in the six months prior to the dual Republican and Democratic primaries in 2000, stocks had advanced 9.5%, continuing a multi-year advance on the last legs of the infamous dot-com boom (and subsequent bust).
On the other hand, the 2008 presidential primaries were squarely in the midst of the worst U.S. recession since the Great Depression. The S&P 500 topped out in October 2007, and was in a steady decline heading into the beginning of primary season in February 2008 and continued to fall until both presidential candidates (Barack Obama and John McCain) were identified that summer.
A Trump Anomaly?
Four years ago, however, was the exception. In the six months prior to primary season kicking off for both parties in February 2016, the S&P 500 had fallen 9.5%. Then, primary season began, Donald Trump emerged as a surprisingly real threat to win the White House, and stocks took off. Was it an anomaly – abnormal behavior in the stock market reflecting an unconventional candidate? Or was it a sign of things to come in this politically charged climate in which our politics seem to seep into every pore of our society, including Wall Street?
We’ll see. I tend to think 2016 was an anomaly in the data. Four out of five times stocks just kept going in the direction they were already going, impervious to the influences of political primary season.
Let’s hope this year makes it five out of six.
After all, stocks are coming off their second-best year since the turn of century. And while they’re unlikely to rise as rapidly in 2020, they don’t appear at risk of collapsing either despite the recent stock market pullback. The guess here is that, unless a recession unexpectedly hits between now and the summertime or (perhaps more feasibly) the coronavirus becomes more widespread here in the U.S., stocks will continue to rise right through the Democratic primaries.
So don’t invest in stocks based on the primary calendar. Invest based on what the charts are telling you. And right now, the charts are painting a pretty picture—regardless of your party affiliation.
Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.Sign up now!