The U.S. presidential and Congressional elections are less than a year away, and many investors are wondering how they will affect the stock market.
Historically, election years have been associated with higher volatility and lower returns than non-election years, as uncertainty over the outcome and the policy implications weigh on investor sentiment. However, other factors influence the market performance, such as economic cycles, pandemics, inflation, and the global geopolitical environment.
In this blog post, we will discuss some of the key trends and scenarios that could shape the stock market in 2024, and offer some tips on how to prepare your portfolio for the election season.
According to a report by Dimensional Funds, the stock market has been favorable overall in 20 of the 24 election years from 1928 to 2020, only showing negative returns four times.1 However, the average annual return in election years was 11.3%, lower than the average annual return of 16.4% in all years. Moreover, the volatility of monthly returns in election years was 15.7%, higher than the volatility of 14.8% in all years.
The report also found that there was no clear relationship between the party of the president or the composition of Congress and the stock market performance.
The average annual return under Democratic presidents was 14.6%, while under Republican presidents it was 10.6%. The average annual return under unified governments (when the same party controls the White House and both chambers of Congress) was 14.3%, while under divided governments, it was 10.7%. However, these differences were not statistically significant, meaning that they could have occurred by chance.
The report concluded that investors should not base their investment decisions on the political cycle, as many other factors affect the market performance. The report also advised investors to stay diversified, avoid market timing, and focus on their long-term goals.
While history can provide some insights into how elections may affect the stock market, it is not a reliable guide for predicting the future.
The 2024 elections will take place in a unique and unprecedented context, as the U.S. and the world are still recovering from the COVID-19 pandemic, facing rising inflation pressures, and dealing with various geopolitical challenges.
The outcome of the elections is also highly uncertain, as many variables could influence the voters’ preferences and behaviors.
According to the New York Times, former president Donald Trump leads a big field of Republican hopefuls, seeking to best President Joe Biden or one of his long-shot challengers.2 Trump has 53% support among Republican primary voters, followed by Florida Governor Ron DeSantis with 16%, entrepreneur Vivek Ramaswamy with 11%, former Vice President Mike Pence with 5%, and former U.N. ambassador Nikki Haley with 4%.
On the Democratic side, Biden has 64% support among Democratic primary voters, followed by environmental activist Robert F. Kennedy Jr. with 17%, and author Marianne Williamson with 9%.
However, these polls are subject to change as new events unfold and new candidates emerge or drop out. Moreover, polls may not accurately reflect the actual voting behavior, as factors such as turnout, enthusiasm, mobilization, and persuasion may affect the final results.
Depending on how the elections play out, there could be different scenarios for the stock market performance in 2024 and beyond.
One of the scenarios is that Biden wins re-election and Democrats retain control of Congress. This scenario would imply a continuation of Biden’s agenda, which includes higher taxes on corporations and wealthy individuals, increased spending on infrastructure, social programs, clean energy, and health care, more regulation on various sectors such as technology, finance, and energy, and more multilateralism on foreign policy and trade issues.
The growth rate of real gross domestic product (GDP), which measures the total value of goods and services produced in the economy, adjusted for inflation. This indicator reflects the overall health and performance of the economy and can influence voter confidence and satisfaction.
The unemployment rate measures the percentage of the labor force that is actively looking for work but unable to find it. This indicator reflects the availability and quality of jobs in the economy and can affect voter sentiment and well-being. According to a report by ThoughtCo, the average unemployment rate in election years since 1948 was 5.6%, higher than the average unemployment rate of 5.3% in all years.
The inflation rate measures the percentage change in the average level of prices of goods and services over time. The indicator reflects the purchasing power and cost of living of consumers and can impact voter expectations and preferences. According to a report by Forbes, the average inflation rate in election years since 1972 was 4.1%, higher than the average inflation rate of 3.9% in all years.
The stock market performance measures the changes in the prices and returns of various stocks and indexes over time. This indicator reflects the profitability and outlook of businesses and can influence voter wealth and confidence. According to a report by Investopedia, the average annual return of the S&P 500 index in election years since 1933 was 11.3%, lower than the average annual return of 16.4% in all years.
These are some of the most important economic indicators to watch during an election year, as they can affect voter behavior and election outcomes. However, they are not the only factors that matter, as other political, social, and global events can have an impact on the economy and the elections. Therefore, investors should stay informed, diversified, and focused on their long-term goals rather than trying to predict or time the market based on short-term fluctuations or uncertainties.