Sydney: As the US presidential election nears with the outcome on a razor's edge, financial markets around the world, including in Australia, are paying close attention to potential economic impacts.
With candidates from each side proposing starkly different economic policies, investors are feeling heightened uncertainty. Growing global tensions, including strained relations with China and conflict in the Middle East, have driven the price of gold – a traditional safe-haven asset – to new highs.
Looking back over nearly a century, history reveals an intriguing pattern, despite common stereotypes, stock markets and the US economy have often performed better under Democratic leadership. Research by economists Lubos Pastor and Pietro Veronesi from the University of Chicago shows that, between 1927 and 2015, the economy grew an average of 4.86 percent under Democratic presidents, compared to 1.7 percent under Republicans. Additionally, the ‘equity risk premium’ – or returns on stocks above the risk-free rate – has been higher under Democrats, reaching 10.9 percent.
The reasons for this trend are debated, with one theory suggesting that during economic downturns, voters lean towards Democrats’ wealth redistribution policies, perceived as safer. Transitions to Democratic leadership, including recent ones under Bill Clinton, Barack Obama, and Joe Biden, often occurred during times of economic strain – a trend supporting the idea that risk-averse voters may turn to Democrats when markets are down.
Interestingly, the impact of US elections extends internationally, as shown by increased correlations in Australian and global markets with the US during election years. Pastor and Veronesi’s findings reveal that even Australian stocks have shown a higher risk premium under Democratic US presidencies – an 11.3 percent increase on average. Markets in the UK, Canada, France, and Germany have demonstrated similar patterns.
Despite these historical trends, experts caution that another Democratic victory in November may not bring a market surge, as it would represent continuity rather than change, and the current economic climate in the US is already strong. Furthermore, studies indicate that short-term market reactions to elections do not generally favour one party over another. However, an unexpected Republican win could lead to a temporary stock bump, likely due to a stronger affinity among fund managers for Republican policies.
As the world watches, the US election outcome is likely to impact financial markets far beyond its borders, reflecting America’s influential role in the global economy
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