How Elections Impact Stock Markets

6 min read

Dear Reader,

Welcome back to our latest edition of Market Insights with Sanjeev Kaushik.

In this edition, we explore how market movements in the months leading up to Election Day can signal potential outcomes and what these signals might mean for your investment strategy.

Additionally, we examine how investors typically react to election results, including shifts in asset allocation and changes in risk tolerance.

So let’s dive right into it..

Today at a glance:

  • How Election Years Impact Stock Markets
  • Five Historical Election Year Market Trends: A Guide for 2024
  • The Financial Advantages of Share Buybacks
  • Power of Compounding – From the Vault

Election Day and Stock Market Performance

Separating Fact from Fiction

How do elections impact the stock market and portfolio returns? Should long-term investors even be concerned about elections? These are the questions investors and financial professionals are contemplating as we approach US Presidential elections 2024 on November 5.

To provide insights, we have analyzed 90 years of market and election data, courtesy of Capital Group, and identified five key ways elections influence stock returns and investor behavior.

Markets Up No Matter Who Wins


Politics can bring out strong emotions and biases, but investors would be wise to tune out the noise and focus on the long term. That is because elections have, historically speaking, made almost no difference when it comes to long-term investment returns.

Which party is in power has not made a meaningful difference to stocks either. Since 1933, there have been eight Democratic and seven Republican presidents, and the general direction of the market has always been up. What should matter more to investors than election results is staying invested.

What does this mean for 2024?

While this year has been unique in countless ways, a look at past election cycles shows that controversy and uncertainty have surrounded many elections. And in each case the market continued to be resilient. By maintaining a long-term focus, investors can position themselves for a brighter future regardless of the outcome.

Gridlock or Sweep: Equities Keep Climbing


The presidential election is not the only one to watch. The results of key legislative races could determine whether either party controls both chambers of Congress, making it easier to fulfill their policy agenda. Investors often fear such “red wave” or “blue wave” scenarios, but assuming such an outcome will lead to meaningfully lower stock prices oversimplifies the complexities of stock markets.

History shows that stocks have done well regardless of the political makeup of Washington. Since 1933, there have been 44 years when one party has controlled both the White House and Congress at the same time. During these periods, stocks averaged a robust 14.4% return, slightly higher than the average gains when Congress was split between the two parties. Historically the “least good” outcome has been when Congress is controlled by the party opposite the president, but even this scenario averaged double-digit returns.

What does this mean for 2024?

Many election watchers expect the Senate to flip to Republican control in November. But narrow margins in both chambers of Congress and shifting polls for the general election mean any outcome is still possible.

Voters may have a strong preference for these results, but investors should take comfort that all of these scenarios have historically produced strong equity returns.

When Markets Call the Election


A simple stock market metric has predicted the winner in 20 of the last 24 presidential elections since 1936.

If the S&P 500 Index rises in the three months before Election Day, the incumbent party usually wins. Conversely, if markets fall, the opposing party typically wins. This is because markets “price in” uncertainty, including that from upcoming elections.

When the stock market and economy are strong, there is less motivation for change, benefiting the incumbent. In more challenging times, the market’s volatility increases due to the uncertainty of potential policy changes, favoring the opposing party.

What does this mean for 2024?

The S&P 500 Index has risen 18% this year (through July 11), and U.S. GDP has been positive for seven consecutive quarters. A strong economic and market environment typically benefits incumbent candidates. However, higher volatility in the months ahead may occur as voters wrestle with a contentious campaign.

Although it will be interesting to watch how stocks move leading up to the election, investors should not use it as a reason to try to time markets. Historically, whether the incumbent wins or loses, election volatility has usually been short-lived and quickly given way to upward moving markets.

Why Investors Play It Safe During Election Years


It can be tough to avoid the negative messaging around election coverage. And it is natural to allow the rhetoric of political campaigns to make us emotional. History has shown that elections have had a clear impact on investor behavior, but it is important that investors do not allow pessimism to steer them from their long-term investment plans.

Investors often shift assets into low-risk money market funds during election years and back into equity funds after elections. This pattern suggests a desire to minimize risk during uncertain times, but market timing is rarely successful and can harm portfolio returns.

What does this mean for 2024?

Net money market flows soared $971 billion last year while equity flows were relatively flat. This pushed money market fund assets to record levels — $6.1 trillion as of July 10, 2024, according to the Investment Company Institute. At these levels, many investors’ portfolios have likely become misaligned with their long-term goals. Speaking with a financial professional can be helpful to ensure portfolios are well-diversified and in line with investment objectives.

Long-Term Risks of Election-Year Cash Positions


Investing during election years is more effective than sitting on the sidelines. Analysis of three hypothetical investors over 23 election cycles, each with a different investment approach, showed that the one who stayed in cash had the worst outcomes 17 times and the best outcomes only three times.

Investors who remained fully invested or made monthly contributions saw higher average portfolio balances and better performance. This highlights the importance of sticking to a long-term investment plan based on individual objectives, rather than attempting to time the market based on political events. The key is to focus on long-term goals and ignore short-term noise.

What does this mean for 2024?

Cash investors have enjoyed their highest yields in decades, but those rates have paled in comparison to stock returns. Between October 2022 and June 2024 — a period in which money market fund assets increased from $4.6 trillion to $6.1 trillion — the S&P 500 Index rose more than 55%.

It is too early to know the long-term portfolio impact of this flight to cash, but it is safe to assume many investors missed at least some of this powerful equity rally and remain on the sidelines ahead of the November election.

The Financial Advantages of Share Buybacks

In this video, we dive deep into the world of share buybacks, using NVR Inc. as a prime case study to illustrate how this financial strategy can add significant value to shareholders.

Power of Compounding


We delve into the renowned Rule of 26, revealing how it can accelerate your investment journey

But that’s not all! We will uncover a often-overlooked aspect of compounding returns that can significantly impact your financial growth.

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