The 2024 general election is in full swing, as evidenced by the seemingly nonstop news coverage of speeches and campaign visits along with endless political ads, robocalls and text messages. There’s a common belief that elections have significant impacts on financial markets, but is this actually the case? We take a look at some of the key considerations below:
- A key feature of many elections is uncertainty, and uncertainty tends to make financial markets jittery. It is true that markets tend to be more volatile leading up to an election, but once the results are known the uncertainty tends to fade away and markets can refocus on the fundamentals. While the general election is still a couple months away, 2024 has so far been somewhat of an outlier. By Labor Day, the S&P 500 had already returned about 19% and reached 38 new all-time highs.
- In 74% of election years since 1932, the S&P 500 finished the year higher. Therefore, history suggests that U.S. stock returns tend to be favorable in election years. Said another way, stocks returns are generally favorable most years and elections usually aren’t the reason for poor returns.
- Building on the above, the average return of the S&P 500 in election years since 1932 is 6.2% compared to an average return of 8.7% in all years since 1932. This seems to suggest that elections do impact returns, but this isn’t the whole story. Some severe bear markets have occurred in election years, with the global financial crisis in 2008 and the dotcom bubble bursting in 2000 being recent examples, but these events had little to do with politics. Removing these drawdowns from the equation brings the long-term average return to 9.1% in election years.
- From 1933 to 2023, there have been a total of 44 years of so-called unified government, where one party controls both the White House and both chambers of Congress at the same time. Historically, this configuration has produced the highest average annual return of 14.4%, but it’s only modestly higher than the average return when Congress was split between the two parties (13.7%). When Congress was unified but the White House was occupied by the other party, average annual returns were still in double-digits (11.7%).
- Despite all the above evidence which suggests markets tend to do well in election years (albeit with a little higher volatility than normal), investors often shift their portfolios to more conservative investments in election years. Morningstar data has shown that money market inflows spike in election years, meaning investors want to sit on the sidelines until the uncertainty has passed. However, market timing is rarely a winning strategy and can cause problems for investors, especially in election years. In both of the two most recent elections, markets rallied from the Friday prior to election day and election day itself, and markets surged after the results of the 2020 election were known. Unfortunately for market timers in these cases, they missed out on considerable returns.
Rather than elections influencing markets, it seems more likely that elections influence investor behavior. This makes sense since political campaigns tend to make us emotional, and despite our best efforts, investing often makes us emotional as well. But it’s clear that our political beliefs should be exercised at the polls rather than in our portfolios. While the past cannot predict the future, at least as far as investing is concerned, we should brace for heightened volatility in financial markets through the remainder of the election, but we should also do our best to tune out the noise and stay committed to our long-term goals.
The views expressed represent an assessment of conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, products, sectors or markets in general.
The above statistics and/or commentary has been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness. Past performance is no guarantee of future results.
This is not a complete analysis of every material fact regarding any company, industry, or economic condition. Due to shifting market conditions, all expressions of opinion are subject to change without notice.
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