US presidential elections often get voters riled up, and this cycle is more heated than most.
With the major party conventions underway, election rhetoric is white hot, the country is deeply divided along partisan lines and both GOP standard bearer Donald Trump and Hillary Clinton, the Democratic nominee, are epically unpopular, according to polling data.
What does this mean for stocks?
That may seem like an odd question just now, what with major US indices hitting record highs.
Yet, history shows that election cycles brimming with partisan animosity are not good for equities on average, according to research studies.
The reason: Investors are anxious, if not baffled, about the policy outlook going forward.
There’s huge uncertainty about the future economic policies of Trump, who tends to pivot in a lot of different directions when it comes to details.
Hillary Clinton’s policies are better known and she has a slight edge in the polls.
Yet, most analysts think this election will be a close one, and Trump has surprised pundits time and time again who’ve written him off over the past year.
All this uncertainty is bad for stocks, which tend to underperform in “open” election cycles in which no incumbent is running.
Political passions also shape investors’ sentiment after the election.
One study in 2012 revealed that people’s optimism about the economy and stocks is heavily colored by whether their candidate won or not.
Here’s what the study’s three authors concluded:
Individuals become more optimistic and perceive the markets to be less risky and more undervalued when their own party is in power.
Specifically, when the political climate is aligned with their political identity, investors increase allocations to risky assets and exhibit a stronger preference for high market beta, small-cap, and value stocks.
Investors are political animals, too.
Political conflict and uncertainty make investors more cautious and markets tend to under-perform during times of intense political friction in US elections.
Once the votes are counted, investors whose candidate triumphs tend to go into risk-on mode.
Such are the animal spirits unleashed during America’s political season.