The Impact of Elections on Financial Markets

“Every four years in the presidential election, some new precedent is broken.” – Nate Silver

Since we wrote in March about how presidential elections can affect equity performance, much has changed on the political landscape. What began as a precedent-breaking campaign featuring the two oldest presidential candidates went on to break further precedent when President Biden withdrew from the race on July 21, and was replaced by Vice President Kamala Harris. This sudden and dramatic turn of events upended the election race and added even more uncertainty to existing volatility in the markets.    

We know presidential election years on their own can be anxiety-inducing for investors. The cacophony of prognostications from pundits and inevitable negativity from the candidates are amplified by social media. Throw on top of that an already topsy-turvy market environment, and it’s enough to make even the calmest of investors at least a bit uneasy.

What moved the markets this summer

Although the stock market sell-off from late July to early August 2024 may seem suspiciously timed with President Biden dropping out of the race, Biden’s stepping aside was only one factor that may have spooked the markets. Renewed recession fears following an uptick in unemployment, less-than-stellar earnings announcements from tech darlings like Microsoft, Alphabet and Amazon, plus an unexpected interest rate increase by the Bank of Japan all played a part in ramping up investor anxiety.

As polls tightened, uncertainty about the outcome of the election ratcheted higher. This seemed to cause an unwinding of the “Trump trade” that had positively impacted markets from the first presidential debate until the market’s peak on July 16. The so-called Trump trade reflected a general sentiment that a Trump presidency would be good for the stock market if his second term included the same trademarks of his first term (e.g., deregulation, tax cuts and an increase in fiscal spending). Notably, the Trump trade had a negative effect on the bond market as the implications for what tax cuts and increased spending might mean to the level of U.S. debt pushed up longer-term interest rates. 

Market trends in election years

Even with the increased clamor surrounding this election, it’s helpful to remember that in election years, markets tend to process all available information and use that info to set asset prices, just as they do in non-election years. Despite the outsized attention paid to election results, election years have generally been good years for market performance.

From 1928 through 2023, the S&P 500 Index (note: this index didn’t reach 500 companies until 1957) averaged an annual return of 11.5%. In presidential election years, the S&P 500 averaged only slightly less, 11.0%. Since 1928, there have been only four election years with negative returns¹ – 1932, 1940, 2000, 2008 – all of which featured large exogenous shocks that were not directly connected to the presidential election. In 1932, the U.S. economy was still in the throes of the Great Depression. In 1940, World War II was underway in Europe and Asia. The tech bubble burst in 2000, triggering a three-year-long market decline. And in 2008, the Global Financial Crisis broadly impacted markets. While markets dislike the uncertainty that a tight presidential race creates, after the election is over, regardless of the outcome, at least some amount of uncertainty is removed from investor calculations.

When it comes down to it, the impact that election uncertainty may have on the markets is no different than other forms of uncertainty that may rattle markets. One example is how stocks reacted in 2022 to the prospect of a recession caused by the Fed’s tightening monetary policy. Markets quickly priced in a high probability of a recession, which ultimately did not transpire.

Making significant portfolio changes at that time in response to the mere fear of a recession wouldn’t have been a wise course of action, just as making big portfolio changes isn’t advisable now based on a fear of what the presidential election results may or may not mean for future policy. That said, future policy decisions, such as changes in the tax laws, may have implications for your financial plan, and your Corient Wealth Advisor is ready to assist you with those issues as they arise.

Stay focused amid election distractions

Even though the political calculus may have changed in the last few weeks, the overall message remains the same. Investors cannot control the outcome of the election. Therefore, we should focus on those things we can control, mainly:

• Avoid making rash decisions based upon the emotions of the moment
• Review your asset allocation and confirm that it’s appropriate for your risk tolerance and financial objectives
• Maintain perspective and discipline around your long-term financial plan
• Take advantage of opportunities to rebalance your portfolio and/or engage in tax-loss selling

When investing during times of stress – politically driven or otherwise – it’s even more important to keep a healthy perspective despite the “noise.” It’s less about making the perfect decision at the perfect time than it is about avoiding significant errors that could have long-lasting impact on your portfolio. Investors who can maintain discipline during periods of uncertainty will typically be better positioned to reap the rewards when the uncertainty subsides. Furthermore, it’s critical not to let your political persuasions affect your long-term investment strategy and approach.

¹ https://www.slickcharts.com/sp500/returns#google_vignette

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