HOW COULD US ELECTIONS 2016 AFFECT THE INDIAN STOCK MARKET?

The outcome of the US presidential elections are still unknown and that uncertainty slowly creeps on to impact the stock market as well. However there are opposing views to this as well, as is prevalent in the stock market. While some say that the presidential elections in the US do not affect the Indian stock markets, but according to other experts the presidential election does coincide with favorable markets.

Let us take a look at some reliable sources that have researched and stated how presidential elections in the US might affect the stock market:

• A 2003 article in the Journal of Finance by Pedro Santa-Clara, professor of finance at the Nova School of Business and Economics and Rossen Valkanov, professor of finance at the Rady School of Management at UC San Diego states that they found 9% higher US stock returns when the Democrats take the seat. Of course, this can result in similar upscale in the Indian markets as well.
• This claim was later corrected in 2004 by two Federal Reserve Economists, Sean Campbell and Canlin Li who made the corrections and stated that the 9% higher returns dropped to 4% and they concluded that market returns didn’t track with which party won the presidential elections.
• The editor of “7 Fascinating Facts About How US presidents Affect the Stock Markets”, Sam Ro reports “the third year of a US president’s term is usually best for the stock market.”
• Again, according to the Christian Science Monitor dated February 2012, the last seven months of an election year always provides boost to portfolios and normally the market delivers positive returns.
• In an extremely logical client note, Goldman Sachs mentions why presidential elections tend to influence the stock market. First of all, presidential elections often result in changes in economic policies that indirectly affect the stock market. This has the potential to affect all the different asset classes because of the sensitive nature of the stock market.
• In “A Presidential Reason to Buy Stocks”, a reporter states that the stock market performs better in the second half of a presidential term rather than the first two years.
• Similarly in “The Presidential Term: Is the Third Year the Charm?”, the authors claim that their research shows that equities in the stock market prosper more in the second half of the term, especially during the third year.
• Of course there are opposing views that the presidential election does not affect the stock market at all. According to Rodney Sullivan of CFA, the data has been misused and what drives the stock market is the macro economy rather than the presidential cycle. There have been instances of stock prices falling during the third year of a presidential term.

The stock market hates uncertainty and during the current US presidential elections, uncertainty is at its peak in with major contenders vying for the White House. The US presidential elections not only affect their own domestic market but they affect the global market that includes the Indian stock market as well. We expect the US markets to be choppy in the run down to the elections and with many candidates pointing to curb visas to Indian IT and ITeS companies, things look uncertain for Indian companies with a direct US exposure in the near term.

While most research points to the fact that the stock market is indeed affected by the presidential election process, opposing views will always exist. One cannot of course rely solely on the presidential election regarding the stock market but it does affect it somewhat indirectly.