The best performing sectors before sweep elections tend to underperform afterwards, and vice versa

We dig through the historical data on previous sweep elections and come to two conclusions: 1) sweep elections do mark changes in relative sector performance; and 2) the 2008/2002 sweep elections occurred near the end of bear markets, suggesting sweeps can be symptoms of underlying trends.

The last US elections that resulted in one party controlling the House, the Senate and the presidency occurred in 2016, 2008, 2002, 1992 and 1976. 2002 and 2008 occurred after lengthy bear markets and 2016 also occurred when equity markets were treading water. This seems to suggest sweep elections are often symptoms of underlying trends. Bear markets coincide with an unhappy population, which then vote for sweeping changes in government.

Charts Source: Bloomberg, Macrobond and Variant Perception

Thus we don’t see any great value in drawing inferences from sweep election timing on overall market trends as the impact from elections is hard to disentangle.

However, one interesting bit of analysis we found is that sweeps can cause changes in market leadership, in particular, causing the best performers to become underperformers and vice-versa.

We take the 10 GICS Level 1 S&P sectors and rank their performance heading into sweep elections and then observe the subsequent relative performance vs the S&P.  The chart below shows sectors that performed the best on a trailing 24-month basis heading into the sweep election, ended up with very negative relative performance in the subsequent 24 months. The analysis is done based on the November election dates rather than the January change of power.

Charts Source: Bloomberg, Macrobond and Variant Perception

On average, the best performing sector heading into a sweep election ended up underperforming the S&P by 26% after the election; the second best performing sector before the election underperformed by 7% after.

Obviously this is not a perfect relationship, but the pattern of the best performers underperforming and the worst perfomers outperfoming is preserved.

We run the same analysis using 12-month horizons into and out of the sweep election. Again we see a similar picture of the best performers underperforming after the election and the worst performers outperforming.

Charts Source: Bloomberg, Macrobond and Variant Perception

Looking at 6-month horizons before and after elections gives a similar shape.

Charts Source: Bloomberg, Macrobond and Variant Perception

And so does 3 months.

Charts Source: Bloomberg, Macrobond and Variant Perception

In our view, there are intuitive explanations for this pattern. There appears to be an element of “buy the rumour, sell the fact” price action, where participants position for the sweep, and after the election, position-squaring causes mean-reversion in prices.

It could also be the case that large changes in policy after the election have different impacts on market sectors and drive flows across sectors.

Excluding the 1976 election – when the economy was in the middle of stagflation – did not significantly change this pattern. This is quite surprising given the economy was still reeling from rampant inflation and tight monetary policy.

Today, technology and the Amazon-dominated consumer-discretionary sector have been the best performers into the election, while financials and energy have been the worst.

Charts Source: Bloomberg, Macrobond and Variant Perception

After this election’s “blue sweep”, our analysis corroborates our previous work highlighting the bullish case for financials and energy, and some signs of outflows in technology in recent months.