How The Stock Market Reacts After A Presidential Inauguration
It is widely known how little fundamental investors care about the effect of the market during certain national events. This is the time period when technical investors feel they produce the most results. The meat of their trading returns come from major swings in the market during historical moments. Some key occasions are planned out, while others are a complete surprise.
The Presidential Inauguration is a scheduled ceremony, so the timing of price swings is perceived as obvious. However, the day of the event, number of days following the event, and which stocks that will be impacted are unknown. We can be sure there will be some surges and dips throughout different industries based on the outlook and background of the administration taking over.
Another area of assumption is the changing of political parties taking over office. When there is a flip from Democratic to Republican and vice versa, markets typically have a reflex to either the belief or doubt in the new team. If the majority of investors feel skeptical of the economic plans of the new Commander-in-Chief, prices will drop with the hope this period is brief. On the other hand, when investors have a strong belief in the transitioning party, then hopefully it carries on for an extended period as stock prices climb.
Over the past 60 years of Presidential transitions, how many times has the market risen on Inauguration Day? One. Not a single one, until 2017. Every January 20th, representing the commencement of a new President, the market has experienced a drop in the overall market price. Specially, the S&P 500 has dipped every single Inaugural ceremony and three of the occasions it has dropped at least 2%.
The brief declines are understandable as investors are unsure what is to come after the new President takes office. The elected individual’s voters may feel optimistic, but the other party’s supporters are not exactly feeling the same, thus creating a mixed result of the overall market’s pricing. How the market reacts five (5) days following the official sworn in is a different story. There is time for investors to reflect, and then react, as opposed to emotional trading the day of the commencement.
Undoubtedly, stock prices can go either direction on any given day, but does that also correlate to a national tradition that occurs only every four years of this magnitude?
Can investors time the market?
Ask a technical investor the above question. The answer of most will be a resounding yes. Certain patterns and triggers are the sources that influence a stock’s price in the eyes of a technical analyst. Timing is important in the stock market, no matter if the strategy is short or long-term.
The above data does absolutely show a pattern of price movements on the day of Inauguration. So, maybe there is a chance of timing the price shifts for that day specifically. The pattern shows a decline in prices every past Inaugural event. So, is that the safe trade? The past results have proven a pessimistic environment during this time period; however, the probability of the stock prices dropping or rising remains at 50% each direction.
The day of Inauguration has displayed a negative return in over six (6) decades, but the five (5) days following the ceremony has produced a mixture of results over this time. Over the 11 new appointments, 7 of which have bounced back with positive returns over the five days after. Unfortunately, there is no clear correlation to the changing of political parties producing a pattern of price movements.
What Results Will Come From The 2017 Inauguration
It is without saying; we are not certain which direction the overall market will go over time. Over the past few months following the election results, particular industries have benefited and soared due to the industry’s confidence in the elected individual. Specifically, the financial industry rose approximately 21% over the past three months. We can run with the previous 60 plus years showing a mixed effect surrounding the big day or we can wait to see how the market reacts over time.