The Role of Elections on the Stock Market
Author – Aarya Mahesh Karandikar
Elections have the power to mold economic policy, investor mood, and financial market stability. Being extremely sensitive to uncertainty and policy shifts, the stock market responds strongly prior to, during, and subsequent to elections. This essay delves into the complex nexus between election results and the performance of stock markets through ten research studies with particular insights on the impact of elections on the stock market. The results follow in a sequential logical order: pre-election trends, short-run reaction to the elections, post-election patterns, long-run influences, and political-market feedback nexus.
Impact of National Elections on Market Volatility
Bialkowski et al. (2006) examined national elections’ volatility within stock markets. In analyzing a series of national elections for different countries, their research confirmed increased market volatility prior to the eve of national elections due to doubts over subsequent policies. It happened more severely with ambiguous electoral results or candidates entering the polls pledging substantive economic reforms. Investors rebalanced their portfolios according to poll trends, and speculative trading rose in anticipation of possible policy shifts. The study points out the important role played by investor expectations in influencing market movements prior to elections.
Machine Learning in Election-Based Market Forecasting
Azevedo and Suzumura (2024) used machine learning to forecast stock market performance during elections. They created forecasting models based on political sentiment analysis, stock price movements, and economic indicators to forecast market responses. Their results showed that financial markets are generally very responsive to pre-election news, with dramatic swings taking place when political campaigns surprise the public with policy statements. The research highlights the increasing use of artificial intelligence in deciphering investor actions and market trends.
Stock Market Responses to Breaking Election News
Blanchard et al. (2018) examined real-time stock market responses in the 2016 U.S. presidential election. The researchers discovered that financial markets reacted sensitively to breaking election news, with high levels of fluctuation whenever news media announced new front-runners. During election night, when votes revealed a shock win, market volatility shot up. As soon as the confidence in the outcome grew stronger, stock prices became stable, illustrating that resolving uncertainty is important for restoring investor confidence.
Effect of Surprise Election Outcomes on Stock Markets
Crane et al. (2024) studied how surprise election outcomes affect stock market performance. They discovered that whenever the election outcome was contrary to investor expectations—e.g., a candidate’s victory contrary to poll forecasts—market responses were stronger. The research noted that markets responded negatively to surprise changes in leadership but adjusted once new economic policies were announced. This was seen in the 2016 and 2020 U.S. elections, when the markets first declined on account of uncertainty but rebounded as new policies became clearer.
Political Control and Market Cycle Duration
Wang (2018) examined how political control affects stock market cycles. According to his research, the length of bull and bear markets is notably affected by the ruling political party. When one party held the White House and both houses of Congress, the markets witnessed longer bull cycles because consistent government backed economic growth. However, the split between Democrats and Republicans meant shorter bull runs and extended bear periods as both houses could get gridlocked. This study sheds light on investors using political orientation as a guide in making financial choices in the long term.
Sector-Specific Stock Market Reactions to Elections
Upadhyaya et al. (2023) examined the differing reactions of stock market sectors to elections. In their research, they discovered that sectors such as defense, energy, and finance perform better with conservative governments in power, whereas healthcare and tech stocks benefit with more liberal regimes. Through examining past U.S. election trends in the markets, the study highlighted the value of sector-oriented investment strategies in election years.
Impact of Political Stability on Market Growth Phases
Peren et al. (2022) investigated how presidential and legislative political control impacts the stability of the stock market. They established that when Congress and the presidency are controlled by a single party, growth phases in the market last longer as there are no abrupt changes in economic policies. But under divided government, uncertainty about policy dominates, which generates higher anxiety levels among investors and induces market oscillations. Such research indicates the long-term consequences of political stability on financial markets.
Stock Market Sensitivity to Election Outcomes
Tomić et al. (2023) investigated stock market responses to election outcomes through event study analysis. Markets respond more sensitively when election results are very uncertain or where significant economic policy changes are anticipated. Their findings across several cycles of elections suggested that a clear win tends to result in quicker stabilization of the market, while controversial results extend volatility. The research supports the notion that transparency and predictability in elections make for financial stability.
Stock Market Performance and Electoral Outcomes
Bialkowski et al. (2023) explored how the performance of the stock market affects elections. According to their research, good stock market performance favors governments in power because it increases voters’ confidence. Financial crises and economic recessions, on the other hand, enhance the prospects of opposition parties to win elections. This generates a feedback cycle whereby politics and markets keep on influencing one another, as decisions on policy have an impact on market trends, and vice versa.
Electoral Systems and Market Efficiency
Vuchelen (2003) compared the impact of alternative electoral systems on the efficiency of stock markets in European nations. The research revealed that proportional representation tended to produce greater uncertainty in the market, since coalition governments imply more extended periods of negotiation and unforeseen policy shifts. Majoritarian electoral systems, where one dominant party takes power, offer clearer policy direction and lower volatility with higher market efficiency. The results indicate that the type of an electoral system is an important factor in deciding how much influence elections have on stock market performance, apart from political instability. This study highlights that investor confidence and stock market responses are influenced by political structure as well as institutional design in election periods.
Conclusion –
The relationship between elections and stock market performance is shaped by pre-election expectations, election-day surprises, and post-election policy shifts. Investor sentiment, political alignment, and institutional stability play key roles in market trends. Research highlights the importance of political stability in reducing volatility and the growing role of technology in predicting election-driven market movements. Future studies can explore how emerging economies respond to political changes and how investor behavior evolves with shifting election trends.
References –
Alan D. Crane & Andrew Koch & Leming Lin, 2024. “Real Effects of Markets on Politics: Evidence from US Presidential Elections,” American Economic Review: Insights, American Economic Association, vol. 6(1), pages 73-88, March.
Arin K. Peren & Elmassah Suzanna & Kaplan Samuel & Spagnolo Nicola, 2022. “Price of a Surprise: The Effects of Election Outcomes on Stock Market Returns and Volatility,” Review of Economics, De Gruyter, vol. 73(3), pages 211-221, November.
Bialkowski, Jedrzej & Gottschalk, Katrin & Wisniewski, Tomasz Piotr, 2006. “Stock Market Volatility around National Elections,” Working Paper Series 2006,2, European University Viadrina Frankfurt (Oder), The Postgraduate Research Programme Capital Markets and Finance in the Enlarged Europe.
Fan Wang, 2018. “Elections, Political Control and Duration of Stock Market Cycles,” WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201810, University of Kansas, Department of Economics, revised Oct 2018.
Igor L. R. Azevedo & Toyotaro Suzumura, 2024. “From Votes to Volatility Predicting the Stock Market on Election Day,” Papers 2412.11192, arXiv.org.
Jef Vuchelen, 2003. “Electoral systems and the effects of political events on the stock market: The Belgian case,” Economics and Politics, Wiley Blackwell, vol. 15(1), pages 85-102, March.
Kamal Upadhyaya & Raja Nag & Demissew Ejara, 2023. “The 2016 US presidential election, opinion polls and the stock market,” Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 16(2), pages 194-204, December.
Nenad TOMIĆ & Violeta TODOROVIC & Milena JAKSIĆ, 2023. “Measuring the Impact of the US Presidential Elections on the Stock Market using Event Study Methodology,” Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 92-103, June.
Olivier Jean Blanchard & Christopher G. Collins & Mohammad Jahan-Parvar & Thomas Pellet & Beth Anne Wilson, 2018. “Why Has the Stock Market Risen So Much Since the US Presidential Election?,” International Finance Discussion Papers 1235, Board of Governors of the Federal Reserve System (U.S.).
Warwick Anderson & Jędrzej Białkowski & Moritz Wagner, 2023. “The midterm election effect on US stock returns: Some practical considerations for investors,” Working Papers in Economics 23/05, University of Canterbury, Department of Economics and Finance.