If history is any guide, markets around the world – and particularly Asian markets – will have a good 2019.
You see, we’re now in the third year of Trump’s presidential term…
The U.S. election cycle and markets
We’ve written about the U.S. election cycle and its effect on markets before.
Of course, the economic cycle and market valuations – and corporate earnings – generally play a bigger role than presidential politics in the movements of U.S. markets. But there are clear patterns in returns that suggest that U.S. presidential elections have a significant impact on the U.S. stock market. The cycle of anticipated policy changes, economic stimulus, the fantasy that real positive change might happen (and, of course, disgust and despair at politics as usual) all figure into markets.
As we’ve shown you before, U.S. markets have historically done well in a post-U.S. election year, which was 2017. This has little to do with the identity of the person who happens to be sitting in the American White House.
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Recently, the pattern has held.
Since 1928, the S&P 500 has risen, on average, by 5.1 percent in a post-election year. In 2017 (the most recent post-election year, as I’ll explain in a moment), the S&P 500 rose around 20 percent.
On average, the S&P 500 has seen the worst performance in the second year of a U.S. president’s four-year term (which was 2018 for this cycle). The S&P 500 was down 4.4 percent in 2018.
The S&P 500 has historically done the best during the third-year of a president’s term (which we’re calling the pre-election year). This is the time when politicians are thinking about re-election and pumping up the economy – which has a positive effect on stock prices. The S&P 500 has risen on average by 12.8 percent.
This relationship generally holds true in Asia, too.
The U.S. election cycle and Asia’s stock markets
Surprisingly, Asia’s stock markets have been more affected by the U.S. presidential election cycle – especially when a Republican is in power – than the U.S.’s own stock markets. (An important caveat, though: There isn’t that much history for this, as Asia’s stock markets are a lot younger than those of the U.S.)
In the past, Asia’s markets (measured by the MSCI ex Japan Index) overall have performed well during the first year of a new Republican president’s term, rising just over 22 percent on average. In 2017 (the first year of a new Republican president) the MSCI ex Japan rose nearly twice that, 34 percent.
But during the American president’s second year (which most recently was 2018), there’s a slump. The MSCI Asia ex Japan Index has seen average returns of 0.4 percent. Hong Kong’s stock market has risen only 2.5 percent and Malaysia has seen average returns of -1.4 percent. Only Singapore wins in the second year, rising 5.1 percent. True to form, the MSCI Asia ex Japan was down 14.4 percent in 2018.
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And like in the U.S., things take off in the third year (which is 2019) of a Republican president’s four-year term. During this year, the MSCI Asia ex Japan Index has seen average returns of 38.1 percent. Hong Kong’s stock market has risen 35 percent and Singapore and Malaysia have seen average returns of 31.2 percent and 25.7 percent, respectively.
For our purposes in the graph above, we break the election cycle down into four periods:
- Post-election year: The first calendar year after the U.S. presidential election. That was 2017.
- Midterm: The second year. This was 2018.
- Pre-election: The third year of the president’s term, which is also the year before the next election. This is 2019 in the current cycle.
- Election year: The fourth year of the president’s term, and the year in which elections are held. 2016 marked the election year in the previous cycle, and 2020 will be the current cycle’s election year.
However, the sample size for the Asian market results is small. The indexes that we’re using – and Asia’s stock markets – haven’t been around for many four-year U.S. presidential cycles. And broken down by the two major U.S. political parties, the sample size is even smaller.
For instance, the MSCI Asia ex Japan Index has seen only seven U.S. presidential election cycles. The small number of data points means that historically unusual periods (like big stock market losses during the global economic crisis in 2008) have a very big impact on average returns.
Why would American politics affect Asia’s stock markets?
Only rarely does American foreign policy towards Asia have a direct impact on stock market performance in Asia. Far more important is the role of U.S. politics on U.S. market movements, and on global stock market sentiment – and therefore also on Asian markets. This may play out in a more important way in smaller, less liquid markets in Asia (where a smaller absolute sum of funds invested or withdrawn can have a far greater impact than in bigger markets). So positive or negative sentiment in the U.S. with respect to U.S. policy, and presidents, might impact smaller Asian markets more than others.
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Twitter-happy U.S. President Donald Trump has also seemed to impact Asian markets more than usual – and markets could deviate from the election cycle norm. In light of Trump’s unorthodox policies and positions and the U.S.-China trade war (which has already caused Asian markets to fall), stock market performance patterns may be completely different over the next year from the past. And recent changes to the tax code in the U.S. may have a positive impact on markets.
But if the U.S. election market performance cycle remains intact – as it has so far – we could be entering the best time of the election cycle for Asian markets.
Publisher, Stansberry Pacific Research