Why We’re Not Worried About the Stock Market & the Election
Turn on any news channel or podcast and you’re bound to hear about it…the 2024 ELECTION.
Next month's Presidential Election is guaranteed to come with an array of controversies and historical moments, there’s no doubt. Given the highly polarizing political environment we are in, many investors may be left wondering if the outcome of the election will affect financial markets - and what they should do about it.
While there are plenty of things about this election that may look or feel different, there’s not a lot of evidence to support that politics are a long-term determining factor of market performance. Below is a brief overview of what history has shown over America’s presidential elections, as well as how investors should consider the election when it comes to their portfolio.
The Stock Market Doesn’t Favor One Party Over the Other
Although popular myths sometimes suggest that one party or the other is “better” for market returns, the historical data proves that these ideas are just theories.
The S&P 500 has historically averaged positive returns under nearly every partisan combination. Stocks have performed well under both Republican ( R ) and Democratic ( D ) presidents, with the strongest returns occurring during the F. Roosevelt ( D ), Clinton ( D ), Eisenhower ( R ) and Reagan ( R ) presidencies.
Since 1930 there have been 23 U.S. presidential elections, with Democratic candidates winning 13 times and Republicans at 10.The average annualized price return (excluding dividends) of the S&P 500 was 9.6% when a Democrat won and 5.7% when a Republican won. But when looking at longer-term horizons, such as 10 years post-election, results for both parties are similar, with the S&P 500 returning around 7%.
The same pattern is observed over the past two administrations. Despite the sizable difference between Joe Biden’s and Donald Trump’s policies and both experiencing bear markets (one caused by the pandemic during the Trump presidency and the other by aggressive Fed tightening during the Biden presidency), stock market returns have been nearly identical. The S&P 500 has returned 14% per year after dividends under each president, highlighting that markets are neither biased toward one party nor exclusively driven by election outcomes.
Market Sentiment and Investor Behavior
Even though headlines around election time and investor opinions can influence short-term market movements, the actual fundamentals are what guide the markets long-term performance. Elections often create a climate of uncertainty for a number of reasons. Stocks may rally in anticipation of favorable policies, and conversely fear of increased regulation or tax hikes can lead to decline. Over the past 40 years, there has been only one instance when the market returns were negative 12 months after an election, during the tech bubble in 2000. And in 6 of the last 10 elections, stocks declined the day after the election, but it was quickly reversed.
Sector- Specific Impacts
Different sectors will respond uniquely to the election outcome.
Here are a few examples:
Healthcare: Changes in administration can significantly affect healthcare stocks. If a candidate is proposing reforms or changes to healthcare policies, this can lead to fluctuations in stock prices in areas such as pharmaceutical companies or insurers.
Energy: Policies favoring renewable energy may boost stocks in that sector, while traditional fossil fuel companies may face tunturns.
Financials: Regulatory changes proposed during a campaign can lead to shifts in banking and financial sector stocks, affecting lending practices and investor confidence.
Long-term Effects
While fundamental conditions predominantly determine market performance, elections can influence short-term volatility. Anxiety about the future and feelings of uncertainty tends to rise as November approaches. This is maybe why numbers show market volatility tends to rise notably around 2 months before election day. But by 30 days after voting, volatility somewhat subsides, returning to normal 60 days post election. Most long-term effects are influenced instead by the policies enacted by the winning president. Things like infrastructure spending, tax reforms and trade policies can have actual lasting impacts on economic growth and market performance. Investors who focus on the foundation of companies and economic indicators can find opportunity regardless of the electoral outcome.
Conclusion
Investors should focus on fundamentals and stick with their plans.
Elections are pivotal moments that can lead to large fluctuations in the stock market and investors should be aware of the potential impacts and remain informed. While short-term volatility can feel frightening, it can also create opportunities for those willing to look past the immediate noise. As we approach the 2024 Presidential Election, staying focused on long-term strategies can help navigate the sometimes turbulent waters of political change.
Actions to Consider
The growth and resiliency of the U.S. economy and markets don’t change with each election, and neither should your investment strategy. Resolve to stay the course and not react to political headlines.
Given the polarized political climate and potential policy shifts, equity market fluctuations could increase as we approach November. But any election-driven weakness will, in our view, prove fleeting. This could present a compelling opportunity to add quality investments or diversify portfolios.
Rising corporate profits, continued economic expansion and the potential for lower yields later in the year provide a positive backdrop for the markets, in our view. We expect this environment to be supportive for both stocks and bonds, but in our view, the greater opportunity lies within equities. This is particularly true in areas of the U.S. market that have lagged and carry lower valuations, such as mid-cap stocks.
Neither political party appears keen to tackle the U.S. fiscal deficit, so debt fundamentals will not likely change. Regardless of which candidate is elected in 2024, it’s reasonable to expect taxes will rise at some point in the future. This may present the opportunity to discuss planning strategies such as Roth conversions with your financial advisor.
- Sylvia McCormick Burns, Co-founder Oakview Wealth Solutions