Every four years the US presidential election creates uncertainty and anticipation, not only in the political world but also in the financial markets. Investors worldwide watch as changes in leadership and policy direction can influence everything from stock prices to currency values. As cryptocurrency, particularly bitcoin, becomes a more significant asset in global portfolios, its behavior around election cycles also draws increasing attention. In this analysis, we explore the impact of US elections on tradfi markets, particularly S&P500, and the relatively newer bitcoin market.

US Elections and the Stock Market: The Case of the S&P500

The S&P 500 chart above shows a historical view of US elections and their potential influence on stock market trends. Marked with election dates and the corresponding victorious party.

• In 2004, a Republican victory was followed by steady growth in the stock market, supported by a strong economy and a housing boom. However, the Federal Reserve began raising interest rates in mid 2004, marking the start of a tightening cycle that would continue for the next two years.
• In 2008, a Democratic victory occurred during the the financial crisis. The market initially fell but recovered significantly in the following years, largely driven by the Federal Reserve’s monetary stimulus and quantitative easing.
• In 2016, a Republican victory saw continued growth in the stock market, but this rally was also influenced by global liquidity and low interest rates rather than just political factors.
• In 2020, amid the COVID-19 pandemic, a Democratic victory coincided with an economic rebound, supported by fiscal stimulus and liquidity injections from central banks.

This historical data suggests that while elections may cause short term volatility they do not determine the stock market's long term direction. Other variables, such as monetary policy, global liquidity, and macroeconomic conditions, play a far more significant role in shaping market trends. In fact, monetary policy decisions from the Federal Reserve, such as interest rate changes and asset purchases, have a more immediate and sustained impact on stock prices than election outcomes.

US Elections and Bitcoin: Observing Trends

Bitcoin’s decentralized nature makes it theoretically immune to government policies, yet it has shown some sensitivity to political and economic events. The chart above shows that bitcoin’s long term price movements are not closely tied to US political cycles:

• In 2012 (Democratic victory), bitcoin experienced a big price increase, but this was more directly linked to its first halving event, a hard coded event that halves the bitcoin inflation every four years. This boosted its scarcity appeal.
• In 2016 (Republican victory), bitcoin’s price also rose sharply following its second halving, highlighting how bitcoin’s internal supply mechanics play a more important role than external political factors. This increase was also supported by broader global liquidity conditions and low interest rates, as central banks worldwide continued their accommodative policies post 2008.
• In 2020 (Democratic victory), bitcoin again experienced a bullish trend, largely driven by growing institutional adoption and concerns over currency inflation due to high fiscal stimulus. The impact of the 2020 halving event also contributed to bitcoin’s price appreciation, aligning with historical patterns.

The data indicates that bitcoin’s halving cycles have more impact on bitcoin’s price than US elections. While elections may cause short periods of volatility, bitcoin’s inflation halving mechanism and growing adoption are the dominant factor influencing its long term bullish cycles. In addition to halvings, global liquidity and monetary policy are important factors in bitcoin’s performance. During periods of expansive monetary policy, investors often seek bitcoin as a hedge against inflation. These macroeconomic factors, combined with bitcoin’s inherent scarcity model, have a much stronger influence on its price trajectory than political shifts in the US.

Why Elections Are Unlikely to Shape Long Term Market Direction

Although election cycles cause uncertainty, this effect is generally short lived. Other factors play a more significant role in shaping financial markets and bitcoin:

1. Monetary Policy: Central bank policies, particularly those of the Federal Reserve, play an important role in influencing asset prices. Interest rate changes, quantitative easing, and liquidity injections have sustained effects on both the stock market and bitcoin, often outweighing any influence from election outcomes.
2. Global Liquidity: The availability of global capital significantly affects both stocks and bitcoin. In periods of high liquidity, risk assets like stocks and bitcoin tend to benefit, while in times of tightening liquidity, markets can experience downtrends, regardless of political leadership.
3. Economic Conditions and Inflation: Broader economic conditions, such as GDP growth, inflation rates, and employment data, are much more important in determining long term market direction.
4. Internal Market Dynamics: For bitcoin, halving events halve supply issuance, adding a layer of predictable scarcity that boosts its appeal as a store of value. For stocks, earnings reports, corporate guidance, and sector specific trends influence price movements.

Conclusion: US Elections Are Only a Small Piece of the Puzzle

In conclusion, while US elections bring temporary volatility to financial markets and bitcoin, they are not reliable indicators of long term market direction. For the stock market, factors such as monetary policy, global liquidity, and economic fundamentals have far more impact. Similarly, for bitcoin, its hard coded inflation halving mechanism and scarcity appeal overshadow any political influence from US elections.

As the 2024 election approaches, we anticipate some short term price swings in stocks and bitcoin. However, the broader market outlook will continue to be shaped by central bank actions and global liquidity. Recent developments indicate a bullish outlook as the Federal Reserve and several other central banks have begun shifting toward an easing cycle, which is likely to increase global liquidity. This shift, combined with signs of a potential "soft landing" for the US economy, provides a favorable environment. It’s worth noting though that not all rate cuts are inherently bullish, the broader economic context is more important and a soft landing could be a key factor in supporting risk assets.

Given this landscape, investors are better served by focusing on these primary drivers rather than attributing too much significance to election outcomes alone. Stay tuned for our upcoming research article, where we’ll dive deeper into the nuanced effects of rate cuts, liquidity cycles and economic context on market dynamics.