2020 Elections: Stocks tend to post gains during periods of transition to a new US administration – Charles Schwab

History shows that following the election, investors seem to turn their focus back to the economic outlook. During past transition periods between outgoing and incoming US presidents, the global stock market has produced both gains and losses. Whether a gain or loss took place from election day to inauguration day depended on the economic cycle: losses during recessions and gains during recoveries or expansions, Jeffrey Kleintop from Charles Schwab reports.

Key quotes

“In general, stocks tended to post gains during periods of transition to a new US administration, but there were exceptions. The transitions to both the George W. Bush and Barack Obama administrations saw market declines, having taken place during the unrelated recessions and bear markets of 2000 and 2008. Recall that the stock market rally after the 2016 election occurred during a favorable period of economic expansion. However, investors may want to note that the current environment may not be as positive, given the lingering economic impacts of COVID-19.”

“The transition periods of the Reagan (1980) and Clinton (1992) administrations were more volatile.  Stocks overall posted gains, but the path included short-term declines of about 5%. Similar to the current environment, these periods came shortly after recessions. 

“The transition between outgoing and incoming presidents has often been a time when foreign adversaries choose to act in conflict with US interests, testing the incoming administration.”

“As President-elect Biden and his transition team replace thousands of political appointees in January, provocative actions by geopolitical rivals have the potential for negative impacts on the stock market, given the currently vulnerable global economic recovery.”

“During the transitions to the George H.W. Bush and Trump administrations in 1988 and 2016, the global economy was in the midst of a long economic expansion. However, geopolitical developments tested both market performance and incoming administrations. Fortunately, these events failed to disturb the global stock market, as the booming economy helped lift stocks to their strongest gains during these transition periods.”

“Market performance during periods of transition to a new administration is more likely to be influenced by the overall economic environment. While the potential for geopolitical events in the coming weeks may be elevated, these flare-ups haven’t made investors historically bearish, outside of a recessionary global economy. This suggests that while some market participants could react to a perceived threat and take defensive actions, the moves may be short-lived if the global economy remains in recovery.”