Regardless of which party wins the November US elections, the Australian market tends to perform well in the first year, writes Wealth Within chief analyst Dale Gillham.
Over the past two years or more, there have been many claims that the US stock market is overheated and that we need to prepare for the bubble to burst as the S&P 500 will crash. Yet the US market is still rising, so should we prepare for a crash or keep buying?
I recently read an article discussing the impact of presidential cycles on the US stock market. Given that the US presidential election will occur in November this year, I decided to investigate how the US election cycle affects the Australian market and its impact on the medium- to long-term direction of the All Ordinaries index.
The presidential cycle is broken up into four-year terms. In analysing the last 10 presidential cycles beginning in 1984, it’s interesting to note that in the lead-up to the elections, if the Republicans are in power, the Australian market tends to experience a dip. But if the Democrats are in power, as they are right now, there is, on average, a 7.2% positive return in the last year of the president’s term. The Australian market is currently up 6.83% and looking bullish, so this trend seems to be well and truly alive.
So, what occurs after the election?
Regardless of which party wins, our market tends to perform well in the first year. Looking at the past 10 cycles, the trend in the first year has been mostly positive, with eight years up and only two either flat or down. The rise itself, however, varies based on which party is in power. If the Republican Party wins, the average increase is 13.4%, but if the Democrats win, the market delivers an average return of 22.68%.
However, things begin to change in the second year of the election cycle. Year two is the worst year of each cycle given that seven out of ten times the market ends negative or flat. So, what does this mean for the Australian market moving forward?
Positive returns?
Given that the Democrats are in power now, we should see a positive return for the All Ordinaries Index this year of around 7% into November 2024. To add to this good news, regardless of who wins the election in November, the Australian market should continue to rise in 2025 with expectations that it will begin to fall away from November 2025.
What about the US market? Well, things are not much different regarding the S&P 500, but remember, before Trump got elected, there were lots of predictions that the stock market would crash, yet it didn’t until COVID arrived, which was at the end of his presidency. Right now, it’s safe to say that I don’t believe the US or Australian market will crash this year.
While this kind of analysis provides some wonderful insights into the history of our market and potential foresight, I encourage you to always analyse a chart so that you are up to date with what is happening as it unfolds, given history does not always repeat itself.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au