The Intersection of Elections and Financial Markets
10/09/2024
Historically, U.S. presidential elections tend to prompt a reaction from the financial markets. What’s less clear, however, is precisely how the markets will react and for how long.
That being said, if you anticipate a market response and understand the significance of these impacts over time, you can go into this election feeling more prepared for any potential fluctuations.
In this article, we’ll examine the many factors that can influence market behavior during an election cycle.
Policies and Market Response: Issues like taxes, tariffs, energy, and immigration – key in the 2024 election – also impact investors.
However, despite the disparity in how each party views these issues, there isn’t much evidence that a candidate’s policies impact the markets as much as fundamentals like the economy, inflation, and Federal Reserve decisions.
Market Sentiment and Uncertainty: Elections are uncertain, and uncertainty typically leads to volatility in the financial markets. We’ve seen this repeatedly with each election year. An EconStor study found that during the 51 days around an election, stock market returns had 20 percent higher volatility than usual.
However, we have also seen that election volatility tends to be short-lived, and election outcomes are not necessarily a determinant of long-term behavior.
They found that financial markets were only minimally affected in the medium—to long-term following an election and that market returns depended more on economic trends.
Despite the uncertainty surrounding an election, most election years have led to positive market returns. A report from Morningstar/Ibbotson Associates found that all but four election years from 1928 to 2016 saw positive S&P Performance.
The four years that experienced adverse outcomes – 1932, 1940, 2000, and 2008 – coincided with major economic events, like the Great Depression in 1932 and the 2008 housing market crash.
Data like this is why it’s essential to maintain a long-term perspective when investing and avoid knee-jerk reactions to short-term market movements.
Interest Rates and Monetary Policy: In September 2024, the Federal Reserve cut interest rates for the first time in four years. That 50-basis point cut could be the first of several, depending on how the markets and economy respond.
The election itself is likely to have little impact on interest rates. However, if the markets become erratic following the election, additional rate cuts could be delayed. If all goes well, experts believe the Fed will cut rates twice more in 2024.
Fiscal Policy and Government Spending: Fiscal policy and government spending can change depending on who is in office and what’s happening with the economy. For example, an increase or decrease in tax cuts or government spending can affect the financial markets.
Democrats and Republicans typically have very different fiscal policies. Democrats usually support low- and middle-income families and aim to reduce income inequality, while Republicans generally prefer supply-side economics, which benefits investors and businesses which can increase jobs.
Despite these very different fiscal approaches, these changes often take time, and the markets can still respond unpredictably. That makes it very difficult to time the market or base short-term decisions on the fiscal policies of a new (or even a returning) candidate.
Trade and International Relations: Changes in trade agreements or policies can increase or decrease tariffs and raw material prices. If costs come down, this can improve corporate stock market performance. But when prices go up, or there are more restrictions, those corporate stocks can take a hit.
Healthcare: Healthcare is often a hot-button topic in elections, and it’s one area where we can see significant changes depending on the administration.
That said, healthcare investments are also seeing low valuations paired with strong long-term potential. Exciting advancements are happening constantly, especially in biotechnology, medical devices, and specialty drugs.
This area could see ups and downs in the short term, but regardless of who wins in November, long-term growth potential looks strong.
Energy: Energy continues to play an essential role in the presidential election, with Democrats prioritizing renewable energy and Republicans seeking to increase oil production and decrease prices.
Clean energy stocks are rising, and experts anticipate they will continue to grow no matter who wins the election this year. Oil could do slightly better under a Democratic regime because less drilling will help keep prices elevated. But overall, experts are not anticipating a significant difference in stocks following the election.
Technology: The technology sector has had a tumultuous few years. Big names in tech – think Nvidia and Tesla – have seen significant price swings caused by the headlines. Many of those stocks could see similar swings during and after the election, particularly in response to changes in policy or laws. There is still plenty of gray area surrounding AI, electric vehicles, social media, and other constantly evolving industries.
Just keep in mind that these tech titans were dealing with volatility before the election and may continue to experience ups and downs after it.
We have repeatedly seen that long-term investments tend to outperform more active investing strategies. Stay the course and avoid making impulse decisions based on election outcomes.
If you have concerns about how your portfolio will handle market volatility, consult your financial advisor to review your investment strategy.
This study found that the average annualized price return (minus dividends) of the S&P 500 was 9.6 percent when a Democrat won the office and 5.7 percent when a Republican won. However, looking at a longer time horizon, results for both parties came in around the same, with the S&P 500 returning about 7 percent.
The data shows that market fundamentals like corporate earnings, interest rates, and economic growth are more critical drivers of market performance than political parties. The market's long-term resilience and ability to recover from short-term disruptions remain strong.
There’s nothing wrong with staying informed about the news and paying attention to how the markets react to changes; just remember to keep a long-term perspective and consult with your financial advisor if you have questions or concerns.
With careful planning and a steady approach, investors can confidently navigate each election season.
This is provided for informational purposes. The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. All investing involves risk including possible loss of principal. Past performance is no guarantee of future results.
That being said, if you anticipate a market response and understand the significance of these impacts over time, you can go into this election feeling more prepared for any potential fluctuations.
How Elections Impact the Markets
Every presidential election is a monumental decision, and anticipation, speculation, and uncertainty can lead to a roller coaster of market highs and lows. As an investor, you should remember that volatility is simply the market reacting to uncertainty itself instead of a true indicator of the market's overall health.In this article, we’ll examine the many factors that can influence market behavior during an election cycle.
Factors Influencing Market Reactions
During an election year, much more is at play than the election itself. Each candidate brings new policies to the table while contending with the country's existing economic challenges.Policies and Market Response: Issues like taxes, tariffs, energy, and immigration – key in the 2024 election – also impact investors.
However, despite the disparity in how each party views these issues, there isn’t much evidence that a candidate’s policies impact the markets as much as fundamentals like the economy, inflation, and Federal Reserve decisions.
Market Sentiment and Uncertainty: Elections are uncertain, and uncertainty typically leads to volatility in the financial markets. We’ve seen this repeatedly with each election year. An EconStor study found that during the 51 days around an election, stock market returns had 20 percent higher volatility than usual.
However, we have also seen that election volatility tends to be short-lived, and election outcomes are not necessarily a determinant of long-term behavior.
Historical Market Performance During Election Years
Investment strategists at U.S. Bank analyzed market data from the past 75 years and found patterns that tended to emerge during election years. To conduct their analysis, the strategists compared the 3-month returns following an election cycle to an average 3-month return overall.They found that financial markets were only minimally affected in the medium—to long-term following an election and that market returns depended more on economic trends.
Despite the uncertainty surrounding an election, most election years have led to positive market returns. A report from Morningstar/Ibbotson Associates found that all but four election years from 1928 to 2016 saw positive S&P Performance.
The four years that experienced adverse outcomes – 1932, 1940, 2000, and 2008 – coincided with major economic events, like the Great Depression in 1932 and the 2008 housing market crash.
Data like this is why it’s essential to maintain a long-term perspective when investing and avoid knee-jerk reactions to short-term market movements.
Key Economic Indicators to Watch
Some economic policies and sectors are more prone to election-related change than others, including:Interest Rates and Monetary Policy: In September 2024, the Federal Reserve cut interest rates for the first time in four years. That 50-basis point cut could be the first of several, depending on how the markets and economy respond.
The election itself is likely to have little impact on interest rates. However, if the markets become erratic following the election, additional rate cuts could be delayed. If all goes well, experts believe the Fed will cut rates twice more in 2024.
Fiscal Policy and Government Spending: Fiscal policy and government spending can change depending on who is in office and what’s happening with the economy. For example, an increase or decrease in tax cuts or government spending can affect the financial markets.
Democrats and Republicans typically have very different fiscal policies. Democrats usually support low- and middle-income families and aim to reduce income inequality, while Republicans generally prefer supply-side economics, which benefits investors and businesses which can increase jobs.
Despite these very different fiscal approaches, these changes often take time, and the markets can still respond unpredictably. That makes it very difficult to time the market or base short-term decisions on the fiscal policies of a new (or even a returning) candidate.
Trade and International Relations: Changes in trade agreements or policies can increase or decrease tariffs and raw material prices. If costs come down, this can improve corporate stock market performance. But when prices go up, or there are more restrictions, those corporate stocks can take a hit.
Healthcare: Healthcare is often a hot-button topic in elections, and it’s one area where we can see significant changes depending on the administration.
That said, healthcare investments are also seeing low valuations paired with strong long-term potential. Exciting advancements are happening constantly, especially in biotechnology, medical devices, and specialty drugs.
This area could see ups and downs in the short term, but regardless of who wins in November, long-term growth potential looks strong.
Energy: Energy continues to play an essential role in the presidential election, with Democrats prioritizing renewable energy and Republicans seeking to increase oil production and decrease prices.
Clean energy stocks are rising, and experts anticipate they will continue to grow no matter who wins the election this year. Oil could do slightly better under a Democratic regime because less drilling will help keep prices elevated. But overall, experts are not anticipating a significant difference in stocks following the election.
Technology: The technology sector has had a tumultuous few years. Big names in tech – think Nvidia and Tesla – have seen significant price swings caused by the headlines. Many of those stocks could see similar swings during and after the election, particularly in response to changes in policy or laws. There is still plenty of gray area surrounding AI, electric vehicles, social media, and other constantly evolving industries.
Just keep in mind that these tech titans were dealing with volatility before the election and may continue to experience ups and downs after it.
Strategies for Investors During Election Seasons
Maintaining a diversified portfolio becomes especially important during periods of volatility or uncertainty. A well-balanced portfolio designed to weather market turbulence is suited to your age, goals, and risk tolerance.We have repeatedly seen that long-term investments tend to outperform more active investing strategies. Stay the course and avoid making impulse decisions based on election outcomes.
If you have concerns about how your portfolio will handle market volatility, consult your financial advisor to review your investment strategy.
Reassuring Insights: Markets and Political Parties
History has also shown us that the prevailing party doesn’t impact the markets as much as you might think.This study found that the average annualized price return (minus dividends) of the S&P 500 was 9.6 percent when a Democrat won the office and 5.7 percent when a Republican won. However, looking at a longer time horizon, results for both parties came in around the same, with the S&P 500 returning about 7 percent.
The data shows that market fundamentals like corporate earnings, interest rates, and economic growth are more critical drivers of market performance than political parties. The market's long-term resilience and ability to recover from short-term disruptions remain strong.
Conclusion: Navigating Election Season with Confidence
Election cycles are brimming with change and uncertainty, often leading to market upheaval. The good news is that the markets tend to calm down in the months following the election, allowing investors to get back on track.There’s nothing wrong with staying informed about the news and paying attention to how the markets react to changes; just remember to keep a long-term perspective and consult with your financial advisor if you have questions or concerns.
With careful planning and a steady approach, investors can confidently navigate each election season.
This is provided for informational purposes. The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. All investing involves risk including possible loss of principal. Past performance is no guarantee of future results.