How Does the US Election Impact the Australian Stock Market?

Over the past two years or more, there have been many claims that the US stock market is overheated and that we need to prepare for the bubble to burst as the S&P 500 will crash. Yet the US market is still rising, so should we prepare for a crash or keep buying?

I recently read an article discussing the impact of presidential cycles on the US stock market. Given that the US presidential election will occur in November of this year, I decided to investigate how the US election cycle affects the Australian market and its impact on the medium to long-term direction of the All-ordinaries index.

Will history repeat itself?

The presidential cycle is broken up into 4-year terms. In analysing the last 10 presidential cycles beginning in 1984, it’s interesting to note that in the lead-up to the elections, if the Republicans are in power, the Australian market tends to experience a dip. But if the Democrats are in power, as they are right now, there is, on average, a 7.2 per cent positive return in the last year of the president’s term. The Australian market is currently up 6.83 per cent and looking bullish, so this trend seems to be well and truly alive.

So, what occurs after the election? Regardless of which party wins, our market tends to perform well in the first year. Looking at the past 10 cycles, the trend in the first year has been mostly positive, with eight years up and only two either flat or down. However, the rise varies based on which party is in power. If the Republican Party wins, the average increase is 13.4 per cent, but if the Democrats win, the market rises an average return of 22.68 per cent.

However, things begin to change in the second year of the election cycle. Year 2 is the worst year of each cycle, given that the market ends negative or flat seven out of ten times. So, what does this mean for the Australian market moving forward?

Given that the Democrats are in power right now, we should see a positive return for the All Ordinaries Index this year of around 7 per cent into November 2024. To add to this good news, regardless of who wins the election in November, the Australian market should continue to rise in 2025, with expectations that it will begin to fall away from November 2025.

What about the US market? Well, things are not much different regarding the S&P500, but remember, before Trump got elected, there were lots of predictions that the stock market would crash, yet it didn’t until COVID arrived, which was at the end of his presidency. Right now, it’s safe to say that I don’t believe the US or Australian market will crash this year.

While this kind of analysis provides some wonderful insights into the history of our market and potential foresight, I encourage you to always analyse a chart so that you are up to date with what is happening as it unfolds, given that history does not always repeat itself.

What were the best and worst-performing sectors last week?

The best-performing sectors included Information Technology, up 3.29 per cent followed by Utilities, up 1.86 per cent and Industrials, Consumer Discretionary up 1.17 per cent. The worst-performing sectors included Consumer Staples, down 3.41 per cent, followed by Real Estate, down 2.44 per cent and Materials, down 1.70 per cent.

The best-performing stocks in the ASX top 100 included Reliance Worldwide, up 19.50 per cent, followed by the A2 milk company, up 16.04 per cent and Block, up 10.22 per cent. The worst-performing stocks included Lend Lease, down 19.57 per cent, followed by IDP Education, down 9.60 per cent and Qantas, down 8.93 per cent.

What's next for the Australian stock market?

With BHP, RIO and CBA all reporting weak earnings last week, it was not surprising that the All-ordinaries index wasn’t bullish, but neither was it bearish as it ended the week down just 12 points. Interestingly, despite the significant weighting of BHP, RIO and CBA on the All Ordinaries index, a fall of 12 points is less than I would have expected.

Given we only experienced a slight pullback, I believe this is a very bullish sign, as it shows that the rest of the market is performing strongly. Therefore, I still anticipate the All-Ordinaries index to break the all-time high in the next week or so.

Once we break the all-time high, the important question most people will be asking is, where to from here? I believe that the answer is up and that you need to be watching for possible short-term resistance at 8,150 points, with my higher-end target at 8,750 points. The top-end target is a rise of around 10 per cent, and I expect to see that in the coming month before the next significant fall.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.