Impact of US Elections on Sensex: How it Navigating the Market Trends and Drop

SUMMARY

The US presidential elections have always stirred global markets, with India’s Sensex no exception. But does the political leaning of the US president meaningfully impact Indian markets? Or could this volatility provide an opportunity for the more discerning investor? Read on to find out.

Historically, there is no long term structural impact of USA elections on Indian markets

The markets have been bumpy since mid-September. One reason cited was the potential outcome of the USA elections and the consequent impact on US markets—and by extension, Indian markets. Similar to IT, there is a perception that presidents of certain US political parties favor India more than others, and so markets do well during those tenures.

While political inclinations could be true - we do not comment on that. Our goal is to look at the markets and see if the political leanings of the US president impact our markets.

In the table below, we look at the performance of the S&P500 (USA stock market) and the Sensex over the past six presidents (nine presidential terms). As can be seen, Indian markets have managed to do well regardless of the president and their political affiliation.

If one were to point out that during the term of Bill Clinton, market reaction was mediocre, one just has to look at the performance delivered during 2 Obama term and during the past 4 years, when Mr. Biden was president. It could be argued that median returns are higher during times of a Republican president versus a Democrat. We would counter by saying that is not the right way of looking at the data.

Indian markets have evolved a lot over each of these periods and so have their characteristics and compositions. Besides that, domestic factors and other global factors would also have impacted markets.

Bottom line - a growing economy like India is expected to deliver, despite any president at the helm and not because of it.

Source: News articles, investing.com; *Please note the term of a USA president is 4 years; We have calculated the CAGR returns starting November when the USA president is elected, and not January when they start their term; # returns till November 06, 2024.

Election-induced volatility vs. Economic fundamentals

An analysis of Sensex movements during US elections suggests that while elections can trigger temporary market jitters, they don’t significantly impact the long-term trend. Instead, the underlying economic fundamentals play a larger role in shaping the Indian markets.

For instance, the bear markets of 2000 and 2008 were linked to economic downturns—the dot-com bubble and the financial crisis—rather than changes in the US administration. Despite the timing coinciding with election years, the underlying causes were rooted in economic factors rather than political transitions.

What should Indian investors consider?

Indian retail investors should take a long-term view and avoid reacting to short-term market corrections driven by US election outcomes. While market volatility may spike, it’s essential to focus on India’s economic fundamentals rather than external political events.

In fact, a market correction following the election could present a strategic opportunity. A diversified portfolio that includes sectors resilient to policy changes, such as domestic consumer goods or renewable energy, can help mitigate risks associated with any external shocks from the US.

Strength of the DIIs

As highlighted in our article Growing Confidence of Retail Investors, India has become meaningfully ‘Atmarnibhar’ (self-reliant). The growing strength and confidence among retail investors has kept the markets buoyant despite major FII selling.

For instance, in October 2024 itself - while FII’s offered close to ~₹95,000 crore worth of Indian equities, DIIs purchased a record ~₹1 lakh crore, supporting the market.

Conclusion

The Sensex has demonstrated remarkable growth over the years, largely independent of who has been in the White House. Market fluctuations tied to US elections are typically short-lived, with larger economic factors—such as corporate earnings, fiscal policies, and global economic stability—playing a more critical role. Indian investors should not overly worry about the US election outcome.

Disclaimer: This article is for informational purposes only and must not be considered investment advice. Investors should consult with experts before making any investment decisions.