Politicians love to talk about the economy—how they’ll improve it or how the other guy is ruining it. But at Revo Financial, we prefer data to drama. So we looked at historical market performance to get a sense of how much influence presidential elections really have on the stock market and economy.
The runup: What to expect in early 2024
Markets perform differently in the 10 months leading up to an election. During any given one-year period, analysts at U.S. Bank found that stock indices showed gains of around 8.5%, and bond markets had returns of around 7.5%. But in the year leading up to a presidential election, the averages dipped to below 6% for equities and 6.5% for bonds.
There are multiple factors driving the market during any given pre-election year, so it’s hard to state with certainty that the elections caused the lackluster performance. But we do know that historically, traders and investors don’t like uncertainty.
As humans, we naturally resist change—in psychology, it’s referred to as familiarity bias. In pop culture, it’s “the devil you know.” The gist, however, is that people prefer the familiar. When change feels imminent, as it does during an election year, people and companies may delay making investments.
Performance after an election
While many people assume the market prefers one party or another, the data tells a different story: The party itself matters less than power dynamics. In essence, markets perform better historically when one party stays in power than when we transfer power from one party to another.
In the same U.S. Bank study of market performance around elections, analysts found that when a president is reelected, or when his party retains power, the stock market returned 6.5% on average. When the opposing party won the White House, the stock market returned just 5%.
Based on what we know about cognitive bias, this makes sense. The party in power is a known entity; a shift in power creates uncertainty.
Of course, the November election is about more than the White House. Investors look at power dynamics in Congress as well. They may also consider the balance of power—between the houses of Congress, and Congress and the White House—when evaluating investments.
It’s worth noting that some short-term volatility has been recorded following elections, but volatility is primarily isolated to certain market sectors—think healthcare and energy (or any other industry impacted by a candidate’s major talking points).
What makes 2024 different?
The 2024 election is unique—and not just because we’re making history with the oldest candidates to run for the White House. Instead, 2024 may carry more certainty than previous elections.
At this point, both Biden and Trump are known quantities, in that we’ve experienced four years with both leaders. This eliminates some of the inherent uncertainty. With that in mind, it’s possible factors other than the election may influence investors. There are a few major economic events on the horizon:
- The Federal Reserve continues to fight inflation, meaning there’s increased uncertainty around when interest rates might come down.
- The debt ceiling will need to be extended in January 2025, meaning negotiations are likely to start prior to inauguration.
- Tax Cuts and Jobs Act provisions are set to expire at the end of 2025, meaning whoever wins seats this November will likely need to tackle tax code.
- Affordable Care Act subsidies are set to expire at the end of 2025 as well.
Each of these factors has the potential to significantly impact markets. Some of them may exert more influence on investors than election outcomes.
Purple reigns
The American economy trends towards growth. We’ve recovered from every set back in history, and the stock market has grown consistently over time, albeit with some volatility. All of this has occurred with various political backdrops. There’s little evidence to suggest one party is significantly better for the market or economy than another.
For perspective, there have only been two instances where the S&P 500 lost value during a presidential term in the last 100 years:
- Herbert Hoover (1928-1932): S&P 500 fell 24.7%
- George W. Bush (2001-2009): S&P 500 fell 3%
Both instances come with significant extenuating circumstances: Hoover oversaw the Great Depression; George W. Bush presided over 9/11 and the Financial Crisis. In other words, black swan events probably impacted market performance significantly more than presidential policy.
The biggest takeaway here is that the S&P 500 will always fluctuate in the short term and trend toward long-term growth, regardless of who we send to Washington.
Politics and your portfolio
Like our government, we build checks and balances into portfolios at Revo Financial. When we build client portfolios, we look at your tolerance for risk as well as market conditions. In other words, we design your investment strategy to withstand the type of uncertainty we’re experiencing in the leadup to November. Your financial plan is designed to outlast any single election cycle.
While the (significant) noise around the election may tempt you to scrutinize the economy, your investments, or the policy proposals of those running for office, we find it’s more helpful to ignore the noise and focus on the big picture. Soon, this election cycle will be over, but your goals and priorities will remain.
If you have specific questions about your portfolio leading up to November, please reach out.
