Why Markets Could Rally Right Before the Election

BY SIMON MOORE FOR FORBES.COM

It is understandable that the 2020 U.S. election is being viewed as a period of elevated uncertainty by the financial markets. Indeed, 2020 has seen heightened economic uncertainty, regardless of political events. However, perhaps surprisingly, researchers have historically found positive trends in the markets in the few days right before election day.

Researchers at Quantpedia have found evidence of pre-election drift in the markets. This means that the market tends to trade up in the five days immediately prior to the election. The analysis is based on 35 U.S. elections from 1950 up to 2018, so it includes both presidential elections and midterm elections. During this period, the market, in this case the S&P 500, has historically delivered an average return of approximately 2.5%. That may seem small, but if it holds, it is a relatively attractive return over five trading days. Interestingly, the run-up seems to happen prior to the election. Immediately after the election, the markets tend to lack direction, historically speaking.

As with all quantitative research such as this, there are always open questions. Will this time be different?
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