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By Kevin Cahill ('23)
The presidential election of 2020 was a very confusing but important election for our country, and although it took awhile, we finally have a projected winner, president-elect Joe Biden. This election, just like every other one, will impact many aspects of politics, from domestic policies to foreign relations. However, many people don’t know that elections actually have widespread effects on the stock market. In particular, the recent election had a very unusual and surprising impact on the stock market, therefore affecting the lives of millions of people throughout the nation. To understand this impact, we must analyze the stock market itself and discover why it is so susceptible to political events like elections.
So what is the stock market, and how does it work? The stock market is a complex but interesting marketplace where investors buy and sell shares from different companies. Stock exchanges can be done in-person by more professional and high-end investors, or they can be done virtually by more casual traders. Some people decide to trade day-to-day, meaning that they buy and sell quickly to gain profits from many different corporations. However, others do more extensive research into past trends and become long-term investors, meaning that they put more money into fewer companies and trade over a longer period of time. Either way, all types of investors are subject to sharp changes in the market.
Photo courtesy of markets.businessinsider.com
During an election year, stock market gains typically drop about one percent, meaning that investors tend to make a little less money from their shares than normal. This is because many people sell their shares in fear of new policies and regulations that could be put in place by new government officials. However, with the ongoing uncertainty of the COVID-19 pandemic, this year has been a wild roller coaster ride for the stock market. From the initial stock market crash in late February to the unsteady but gradual recovery from May to November, investors were very much worried about the election and how it could affect the already unstable stock market on the day of the election.
But as you know, there was no clear winner on Election Day. This brought uncertainty and short term volatility, meaning that many people were buying and selling rapidly. This rapid buying and selling cancelled out and caused generally minor fluctuations, and as more and more ballots were counted, the stock market continued to slightly jump and fall unpredictably (see graph below). But now, with the election finally over and the new president-elect Joe Biden coming into office next year, we can finally examine the existing impacts that it has had and predict what it could mean for the stock market in the near future.
The 2020 presidential election is the first election in over 25 years to have an incumbent candidate fail to win re-election. Due to this fact, along with the upsurge of the second coronavirus wave, tensions in the stock market were high the days after former Vice President Biden was projected to win. We saw a sharper fall than usual as people sold shares in various companies, such as private healthcare companies and companies affected by trade and tax policies. Overall capital gains from stocks dropped from 6.5% to 5% within a few days, a larger margin than usual after elections. And from a big picture perspective, a Biden administration could introduce new COVID-19 lockdowns that could cause more unsteadiness in the market and in the economy for months to come. However, current trends show that the stock market is already recovering and will most likely level out by the end of the year.
Photos courtesy of bbc.com and axi.com
This presidential election also had effects at the local level. Think about it: Every student in North Rockland most likely has parents, relatives, or friends with investments in the stock market. Some of the older students may even be investors themselves. And for them, this election was either helpful or devastating depending on the stocks that they held shares in. This all goes to show that presidential elections aren’t just about two candidates and their policies: they also have significant and unpredictable impacts on typical students right here in our own community.
But the presidential election isn’t the only election with an impact: the election results from the Senate and the House of Representatives also play a huge role in affecting the stock market. According to past trends, outcomes where there are multiple political parties in power tend to be less consequential and actually help the stock market. On the other hand, outcomes where there is a party sweep tend to bring a lot of financial uncertainty and therefore typically bring temporary falls in the stock market (see graph below). In our election today (as of November 28, 2020), both the White House and the House of Representatives are nearly safely projected to be Democratic. However, while the Senate is leaning Republican, it is still a very close race. If the Senate becomes Democratic, then there would be a Democratic sweep and most likely a temporary stock market crash.
Graph courtesy of CNBC FactSet Research
So, what does this mean for the future of the stock market? If things stay as projected, with a Republican Senate, a Democratic House of Representatives, and a Democratic White House, then the stock market will most likely return to back to normal in given time. But it all depends on trade, taxes, and especially, COVID-19 policies and restrictions. Nevertheless, this election has and will continue to have unpredictable and widespread effects on the stock market as well as the American economy as a whole.
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