As primary season has continued to evolve, with one Republican candidate now holding a substantial lead on the path to the nomination, the shape of the 2024 US presidential election seems to be coming into much clearer focus.
Whenever a US presidential election rolls around, it's not uncommon to hear it described as "the most important" election year in our lifetime, if only to rally voters to go to the polls.
To be sure, the political order can have sweeping impacts on policy and society. Given the intensity of feelings on both sides of the aisle, it’s natural for investors to assume the outcome could have a major impact on sentiment and prices in financial markets.
But elections have often had less impact on markets than voters might assume, and history shows the challenges of trying to make investment decisions timed to an election year.
With the greater certainty we now have about the shape of this year’s election, here are 5 takeaways on how it might, or might not, impact the markets and economy.
1. Historically, US markets have generally risen in election years.
Since 1950, US stocks have averaged returns of 9.1% in election years, according to research by Fidelity’s Denise Chisholm, director of quantitative market strategy.
Past performance is no guarantee of future results. Data spans from November 30, 1950, to November 14, 2023. Years represent the 12-month period from November 30 to November 30 following a US presidential or midterm election. The chart depicts the average, minimum, and maximum price return achieved during this period. Stocks are represented by the S&P 500®. Indexes are unmanaged. It is not possible to invest in an index. Source: Haver, FactSet, FMR. As of November 14, 2023.
Of course, it’s important to bear in mind that US stocks have historically risen over the long term, so it’s not surprising to see an upward trend in the data.
"Looking at the historical data, it appears that while the 12 months preceding a presidential election have had the widest range of possible market outcomes relative to other parts of the election cycle, the average return isn't substantially better or worse. This points to the presidential election not being a notably 'market moving' event," Chisholm says. “The election cycle is usually not the dominant theme of the market.”
Some investors or voters may wonder if this upward trend is due to the party in power trying to “juice” the economy and markets right before an election. But the historical data doesn’t support this notion, says Anu Gaggar, vice president of capital markets strategy at Fidelity, particularly when looking at developed markets with strong institutions and an independent central bank, such as the US.
“Politically driven economic cycles are more relevant to emerging-market economies or economies with weaker institutions,” says Gaggar. “They’re not as relevant for developed markets like the US.”
2. Down-ballot races may be highly consequential.
Perhaps just as important as the presidential race in November are the congressional races, where control of the House and Senate is up for grabs, says Alice Joe, vice president of federal government relations at Fidelity. “There are slim margins in both bodies of Congress,” says Joe, and both parties face a number of key retirements this year.
While both the House and Senate could be competitive this year, Joe notes that “ticket-splitting”—such as when voters choose a presidential candidate from one party but a Senate candidate from the other—has become increasingly rare, which could impact outcomes.
Those down-ballot races will help determine whether the next 2 years are spent under divided or unified government, and will likely impact how much of its agenda the next administration is able to accomplish.
Joe expects that in a scenario of unified Republican control, priorities might include extending the tax changes stemming from the 2017 Tax Cuts and Jobs Act, which will otherwise expire at the end of 2025, and rolling back provisions of the 2022 Inflation Reduction Act. Under unified Democratic control, there might be a resurfacing of the provisions and priorities included in the Build Back Better Plan. And under divided government there may be a continuation of gridlock, with the next administration relying primarily on regulations, rather than on new laws, in attempting to execute its agenda.
3. Betting on specific policy or sector impacts can be highly risky.
While it’s possible to anticipate potential policy impacts at a very high level, the reality is that at this stage no one can predict with any certainty which party will win certain institutions, let alone what sectors, industries, or stocks may benefit from the next administration’s policies.
Gaggar notes that this unpredictability is backed up by the historical data on sector performance. “There are very few consistent patterns of relative sector returns in election years,” she says, which makes placing sector bets around partisan outcomes very risky.
Past performance is no guarantee of future results. Each box represents 1 calendar year of performance for a calendar year that included a US presidential election. Underperforming indicates that price performance was lower than the S&P 500, while outperforming indicates price performance exceeded the S&P 500. Color of each box indicates whether a Democrat or Republican candidate was elected to the presidency that year. Real estate is omitted due to a lack of sufficient performance history, as it was not established as an independent sector until 2016. Each sector is represented by companies included in the S&P 500 that are classified as members of that sector. Source: Strategas Research Partners, as of November 5, 2023.
Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC, the investment manager for many of Fidelity’s managed accounts, warns in particular against making investment decisions based on campaign-trail promises.
"There are dramatic differences between the proposals expressed on the campaign trail and the actual policy changes that take place once the candidate is in office," says Malwal. "It's exceedingly rare that a candidate will be able to deliver on exactly what they've proposed once they take office. If you're making investment decisions based on such proposals, that could be a risky way of managing one's money."
4. Markets are nonpartisan.
Although popular myths sometimes suggest that one party or the other is “better” for market returns, the historical data does not bear out these theories.
“Markets are nonpartisan,” says Gaggar, “so it’s very important not to base your investment strategy on the outcome of elections.”
The S&P 500 has historically averaged positive returns under nearly every partisan combination, as the chart below shows. And in fact, there’s some evidence that divided government has historically correlated with stronger market returns—perhaps because government gridlock creates less policy uncertainty.
Past performance is no guarantee of future results. Data excludes 2001 to 2002 due to Senator Jeffords changing parties in 2001. Calendar year performance from 1933 through 2022. Source: Strategas Research Partners, as of November 5, 2023.
“Historically,” says Malwal, “there hasn't been a strong relationship between Election Day outcomes and how markets perform from there on out. As a result, Strategic Advisers doesn't adjust our positioning based solely on election outcomes.”
5. Investors should focus on fundamentals and stick with their plans.
No matter which side of the aisle investors sit on, this election cycle is likely to bring emotional ups and downs. And it can be tempting to put your money where your convictions are—whether you feel optimistic or pessimistic about November 2024.
Historically, however, financial markets have largely been unbothered by both presidential and midterm elections, and trying to adjust your investment strategy in the hopes of capitalizing on an anticipated post-election swing in the markets could end up backfiring on you. “If you’re an investor, I would suggest that this shouldn’t be something you focus on,” says Chisholm.
Market moves are more likely to be driven by market and economic fundamentals, such as corporate earnings, interest rates, and other economic factors. "While political headlines may at times cause short-term ripples in the market, long-term, for stocks, bonds, and other investments, returns seem to be driven much more by the fundamentals of the underlying asset classes," says Malwal. As such, Strategic Advisers, LLC, is more focused on economic fundamentals, such as the stage of the US business cycle, the level and direction of interest rates, the job market, and business activity.
And rather than trying to predict near-term political or market cycles, most investors would be better served by adopting a thoughtful long-term financial plan that’s suited to their needs, and sticking with it. "We believe such a plan should be based on an investor's goals, their risk tolerance, and other considerations regarding their specific situation as an investor or as a family,” says Malwal. “But we don't believe market history supports factoring in election cycles when managing long-term investments."
Or as Jurrien Timmer, Fidelity’s director of global macro, puts it, “Elections tend to have less impact on the markets than politicians may like to believe.”
