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What an Election Year Means for Investors and Markets

July 1, 2024

Lynn Snyder, MBA, CFA®, Thomas Jefferson Memorial, Washington, D.C.

It’s no surprise that stress levels rise for many Americans prior to a significant election. A study by Kevin Smith from the University of Nebraska-Lincoln surveyed individuals in the weeks before and after the 2020 presidential election. Unsurprisingly, the results showed higher levels of anxiety prior to the election and lower levels following the election. “We found a lot of political anxiety right before the election …” said Smith, “but pretty much across the board, political anxiety went down following the election, and it went down surprisingly in some groups.”

Suffice it to say, if you are feeling some concern as the current Presidential election season heats up, you are not alone. Election stress can increase for many reasons, and an often-cited concern is the effect an election result will have on the economy and investment portfolios.1 A 2023 Janus Henderson Investor Survey showed that 49% of investors are very concerned and 29% are somewhat concerned with the upcoming Presidential election outcome as it relates to their financial situations.2

Source: Janus Henderson Investor Survey, 2023

So, what effect do Presidential Elections have on financial markets?

The Presidential Cycle

Some encouraging news for presidential election years — historically they’ve been positive for equity markets. From 1928 through 2016, the fourth year of the Presidential term has yielded a positive return 82% of the time, with average returns over 11%. The chart below also shows the third year of a President’s term is typically the best for equity markets with positive returns 91% of the time, while the first 2 years in this cycle have been the weakest:3

Source: Visual Capitalist, 2016

And while the amount of available data is not enough to be statistically significant as there have only been 23 Presidential elections since 1933, the above results make intuitive sense. Presidents are motivated to get re-elected and often implement policies that encourage economic growth in the years leading up to the next election.

Does it Pay to Play Politics with your Portfolio?

Depending on if your preferred candidate wins or loses, investors are often tempted to act based on election outcomes. For example, if your preferred party wins in November, you may be tempted to invest more aggressively in equities and potentially increase exposure to sectors that are expected to benefit. Conversely, if your preferred candidate and party loses, pessimism about the next administration could result in a desire to reduce risk by selling equities and sitting in cash.

The following chart from Capital Group shows, that while election years can be difficult for investors, equity markets have gone up over time regardless of whether a Democrat or Republican won the White House.

Source: Capital Group, “Guide to Investing in an election year,” 2024 edition

Additionally, according to Carson Investment Research, if you had invested $1,000 in the S&P 500 when President Eisenhower took office in 1953 and ignored who was President, you would have almost $1.7 million today. However, if you had chosen to stay invested only during your preferred party’s time in the White House, your returns would have been severely diminished, with less than $65,000 in either portfolio.4

Policy Implications

None of the above implies elections don’t affect capital markets. The next President will have the opportunity to implement significant policy priorities over the next four years, many of which will have financial implications. The Capital Group chart below outlines industries that may benefit depending on which party holds the levers of power after the election:

Source: Capital Group. CHIPS Act refers to the Creating Helpful Incentives to Produce Semiconductors Act, passed by U.S.

Capital Group analysts believe that if a Republican administration can fully implement their priorities, a major focus would be the deregulation in many industries, including the banking, health care and oil and gas sectors. Conversely, in the scenario of a Democratic administration enabled to implement their preferred policies, much of what has been implemented over the past four years, like the CHIPS Act and Inflation Reduction Act, would likely be continued. Potential beneficiaries in this scenario could be renewable energy and electric vehicles and continued financial support for the semiconductor and manufacturing industries.

While policy preferences of the respective administration are somewhat known in advance, predicting how markets will respond is challenging at best. For example, it might be surprising to some to hear that oil and gas stocks have performed much better during President Biden’s administration, while clean energy companies did considerably better during former President Trump’s administration.

Election results are just one factor influencing capital markets. Other capital market drivers which are arguably more important are interest rates, inflation levels, consumer spending, and corporate earnings.  

Looking to November and Beyond

As November approaches, election year rhetoric is likely to become more prominent and while the study of prior election cycles has shown that election outcomes have not been the primary driver of longer-term market returns, the below chart illustrates how policy uncertainty can cause an increase in market volatility as election day approaches.5

Election Jitters? Markets Can Rally as Uncertainty Fades

S&P Moves around U.S. Elections Since 1984, Indexed to Election Day

Source: JP Morgan, Private Bank

The above chart also shows that while there may be an increase in volatility leading up to the election, once the results are known and potential policy changes come into focus, financial markets have tended to rally.

Rest assured that your Johnson Bixby team will be monitoring how potential policy changes could affect financial markets and tax policy and recommend adjustments to your financial plan as necessary. In the meantime, we will  remain focused on building diversified portfolios that can help meet your long-term goals regardless of this, and future, election results.

Sources:

1CNBC, 2024

2Janus Henderson Investor Survey, 2023

3Visual Capitalist, 2016

4Carson Group, 2024

5JP Morgan, 2024

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