What is the impact of the US elections on investments? Do elections really harm business as some newspapers claim? In this study, we will analyze the behavior of the markets during the last three US elections to better understand this relationship and identify possible opportunities.
For our analysis, we'll start by reviewing the dates of the last three US presidential elections:
- 2020 Presidential Election: November 3, 2020
- 2016 Presidential Election: November 8, 2016
- 2012 Presidential Election: November 6, 2012
In the United States, presidential elections take place on the first Tuesday after the first Monday in November every four years.
To facilitate understanding, we will simulate investments in variable income from the following points of view:
- American investor investing in the United States (S&P 500)
- American investor investing in Brazil (Ibovespa)
- Brazilian investor investing in Brazil (Ibovespa)
- Brazilian investor investing in the United States (S&P 500)
What were the returns obtained on the S&P 500 by a foreign investor during the American election period?
If we use the S&P 500 as a comparison index for variable income investments , we have the following panorama.
Image: S&P500 return of 11.68% in 2012.
In 2012, equity investments in the United States appreciated by 11.68%, despite the election period. We noticed a slight drop in investments on the eve of the elections.
Image: S&P500 return of 11.24% in 2016.
In 2016, variable income investments had an annual appreciation of 11.24%. However, between August and October, there was a slight fluctuation in prices, which stabilized and gained momentum shortly after the elections.
Image: S&P500 return of 14.9% in 2016.
In 2020, we had a very close election, marked by episodes such as the invasion of the Capitol. However, investors who held on to their investments throughout the year obtained a return of close to 15%. Once again, we observed price fluctuations in the months leading up to the election.
Therefore, from the perspective of an American investor, there is no evidence that the equity market has generated negative returns during election years. We observe that in the months leading up to elections, the market tends to go into a holding period. However, the long-term investor who held his investments from January 1 to December 31 in election years saw gains of 11.68%, 11.24% and 15% in dollar terms.
Do the American elections influence investments in Brazil?
Using the Ibovespa as an index that represents investments in variable income , we have:
Image: Ibovespa performance in 2012
In 2012, the Ibovespa index recorded a loss of 2.8%. We note that in the months leading up to the election, especially in October, the index suffered a setback.
Image: Ibovespa performance in 2016
In 2016, the Brazilian stock index rose by more than 40%, with strong gains in the months leading up to the elections.
Image: Ibovespa performance in 2020
In 2020, the American elections did not have a major influence on the Brazilian stock index, which ended the year at the same level as January 1, 2020.
Therefore, for a Brazilian investor investing in variable income in Brazil , we observe that, in 66% of cases, the returns were below expectations . However, in 33% of situations, the market performed above average.
How do the S&P 500 and the Ibovespa compare, in percentage terms, during the last elections?
Image: Total return of the S&P500 and Ibovespa in 2012.
Image: Total return of the S&P500 and Ibovespa in 2016.
Image: Total return of the S&P500 and Ibovespa in 2020.
We note that the Ibovespa's return was below the S&P 500's on two occasions. Interestingly, in 66% of cases, the US elections had a more positive impact on investments in the United States than on emerging markets , particularly in Brazil.
What do investments in Brazil look like from the perspective of a foreign investor?
For investors who do not live in Brazil and pay their bills in dollars, the important thing is to check the yield in their original currency.
Image: Ibovespa's performance in Reais and USD. Source of exchange rate data: Ipedata
As we can see, taking into account the effect of the exchange rate on investments made in Brazil in US election years, in 66% of the cases analyzed in this study, there were losses. In only one of the occasions, a gain was recorded (75.41%), which corresponds to the high level of risk taken by the foreign investor.
What do investments in the United States look like from the perspective of an investor living in Brazil?
Image: Yield in Reais from an investment in the S&P500 .
For an investor who lives in Brazil and pays his bills in reais, investing in variable income in the United States during the elections generated gains in 66% of the occasions analyzed in this study.
Are all variable income investments impacted in election years?
The performance of some investments cannot always be explained by macroeconomics and political effects alone. Remember that careful research into specific opportunities and careful analysis of microeconomic (internal) factors can result in market-beating returns as shown in the example below.
Image: Performance of a stock that outperformed the Ibovespa and the S&P 500 in the 2020 American election year.
However, investing in individual stocks is never recommended for the average investor .
Conclusion
If you are an American investor investing in the United States in an election year, it is important to consider that the months leading up to elections tend to be more volatile.
If you are investing in Brazil during a US election year, keep in mind that the exchange rate risk is greater, although the opportunities for gains may also be more significant.
For Brazilian investors who invest in Brazil, in 66% of the cases analyzed, the returns did not compensate for the risk assumed.
On the other hand, for Brazilian investors who invest in variable income in the United States, 66% of the cases analyzed resulted in positive returns, while 33% presented negative results.
Therefore, investing in an election year really does require an extra dose of courage. Betting on a stronger currency proved to be an advantageous strategy in 66% of the cases analyzed.
