Do Presidential Elections Affect the Markets?

When November 5, 2024 rolls around we will have had a long summer and fall of unrelenting political ads, uncomfortable discussions amongst family and co-workers, doomsaying, policy demagoguing and all-around exhaustion over the whole presidential election. Here’s hoping that once the 5th turns to the 6th, we’ll actually have a clear-cut winner and can avoid any further media hysteria. However, the question still remains, whether your preferred candidate wins or loses, what will happen in the markets and how will it affect your personal financial situation and portfolio.

While we cannot predict the future, we can certainly rely on the past for some insight into how presidential elections will impact your assets.

Markets Hate Uncertainty

Historically, markets have had lower average returns and were more volatile in the first half of election years. However, after primaries have been decided and the election takes place, markets tend to improve. In other words, when the uncertainty is removed from the equation, markets settle down and hysteria subsides and investors get back to the work of investing based on fundamentals and research rather than political craziness.

Key Takeaway: Since 1936, the 10-year annualized return of an investment in U.S. stocks (as measured by the S&P 500 Index) made at the start of an election year was strong, regardless of whether a Democrat or Republican prevailed.

Source: https://www.capitalgroup.com/advisor/insights/articles/2024-economic-outlook.html?sfid=1995476238&cid=81086127&et_cid=81086127&cgsrc=SFMC&alias=btn-LP-A1cta-advisor

Republican or Democrat?

Well as much as one would like to prescribe to the belief that one party is better than the other when it comes to the stock market, historically, it’s just not the case. The stock market tends to continue higher whether the president has an (R) or a (D) after their name.

Key Takeaway: Don’t give in to your political beliefs when it comes to your investment strategy, stick to your investment plan and continue to prioritize your long-term goals.

Source: BlackRock, Student of the Market. Morningstar as of 12/31/23. Stock market represented by the S&P 500 Index from 1/1/70 to 9/30/23 and IA SBBI U.S. large cap stocks index from 1/1/26 to 1/1/70. Past performance does not guarantee or indicate future results. Index performance is for illustrative purposes only. You cannot invest directly in the index.

Don’t Approve of the President?

Believe it or not, some of the best returns in the market are when the president has an approval rating below 50%. However, once that approval rating drops below 35% things get a little dicey and the market averages negative returns.

Key Takeaway: You don’t need to agree with the politics of the president to continue to have strong market returns. The separate, but co-equal branches of government often temper the most “extreme” of policy decisions.

Source: Invesco. Bloomberg, Gallup. Data as of 1/31/2024.

Diversification Will Keep a Portfolio in Good Shape

Historically speaking US small-cap companies (market capitalization from $250MM to $2B) outperform US large-cap (market capitalization over $10B) in presidential election years. Small-cap companies can be better positioned to take advantage of policy changes or economic growth. This underscores the value of diversification within an investment portfolio.

Key Takeaway: Large-cap and mega-cap companies may account for a large portion of a portfolio, but don’t ignore the value of having other types of assets and market-cap exposure to maximize returns and reduce overall risk.

Source: Macquarie, Morningstar.

Elections Are Happening Everywhere

There are more than 50 countries expecting to hold national elections in 2024. While this doesn’t directly have an impact here in the USA, indirectly it could lead to changes in domestic policy (e.g. trade, defense).

Key Takeaway: Again, diversification within an investment portfolio to include international markets will help to diffuse domestic risk, but also allow for potential growth opportunities.

Source: Franklin Templeton.

Conclusion

It is likely going to be a wild election season. And we would add, when has it not been...especially in recent years. Investors are more than welcome to indulge in the guilty pleasure of the game of politics, but know deep down that the US markets are generally agnostic to the presidential election, so staying the course, following your investment and financial plans and controlling what is within your power to control will help keep you from over-exuberance, or consternation...depending on who you’re pulling for.