To say this election season is unusual may be an understatement. In just a few short weeks, Americans witnessed an assassination attempt on one candidate and an unprecedented drop-out from the other—all with less than 130 days left in the race. As both sides continue to rally and regroup in light of these historic events, you may be wondering how such monumental shake-ups could impact investors and the stock market.
Should you be bracing your portfolio to weather another election cycle? Or is it best to ride out whatever happens next?
Below we’re exploring how a presidential election impacts the markets and what (if anything) investors should do to prepare.
But First, What Factors Impact the Markets?
While the uncertainty around who sits in the Oval Office seems like the single most weighted factor on the markets during a presidential run, the reality is there are a number of things that move the markets on a daily basis including:
Corporate Earnings
Corporate earnings and their forecasts for future earnings play a crucial role in shaping stock market dynamics. When a company reports strong earnings and provides an optimistic forecast, it typically boosts investor confidence, leading to higher stock prices and potentially lifting the broader market. Conversely, disappointing earnings or a bleak forecast can cause stock prices to fall as investors reassess the company’s value and prospects. The market often reacts sharply not just to the earnings numbers but also to how they compare to expectations, with surprises—either positive or negative—driving significant price movements. These earnings reports and forecasts also influence overall market sentiment, as they provide insight into economic trends and the health of various industries, affecting investment decisions across the board.
The Economy
Economists measure economic health by looking at a variety of economic indicators. Gross Domestic Product (GDP), inflation rates, investor confidence, consumer sentiment, the unemployment rate, and other data paint a picture of the economic environment and whether it’s favorable for business growth.
Fiscal and Monetary Policy
Controlled by the Federal Reserve Bank, monetary policy involves the management of the money supply through adjusting interest rates. Fiscal policy is government-managed and involves spending and tax policies that influence the economic environment.
Together, monetary and fiscal policy are used to regulate and control economic conditions that impact business and stock market performance.
Regulation & Deregulation
Regulations impact corporations’ ability to conduct business in certain ways, which can impact critical business decisions—like pricing, marketing and advertising, and other factors that can show up in the stock market.
Innovation
Rapid innovation, disruption, and new technological developments can influence where investors put their dollars in the stock market. It can provide a boost to companies releasing new innovations, or it could make legacy technology irrelevant.
World Events
Global events—like geopolitical conflicts, natural disasters, worldwide health crises, and world leader elections—can cause fear about what’s to come. Investors may choose to pull out of the markets or invest in less volatile sectors if candidates express unfavorable opinions or indicate regulatory changes to certain sectors.
The takeaway is clear: the stock market’s performance is not dependent on one factor. It’s influenced by many things, often at the same time. Just as one event ends, another could begin and shift investors’ attention to the next concern.
Why Do Elections Worry Some Investors?
Despite the variety of factors that can impact the markets, certain events of such magnitude, like presidential elections, may result in short-term volatility—though it’s less about which party takes power and more about the potential for change. Remember, markets tend not to like change.
A new leader in the White House—and in Congress—impacts the dynamic between the Executive and Legislative branches, causing uncertainty about new government policies and our country’s long-term economic health. Aligned branches can more easily pass more new laws—potentially stimulating economic growth—while politically misaligned branches may be slower to pass legislation.
While this system of checks and balances is beneficial for a number of reasons, it introduces another ingredient of uncertainty in the market volatility equation.
A Historical Look at Stock Market Performance During Election Years
It may be surprising, but history shows time and time again that the market has seen more positive performances than negative ones during election years. According to an analysis by First Trust, 83% of election years have seen a positive performance in the S&P 500 Index since 1928.¹
Though, of course, not every year will be positive. Considering events like 9/11, the 2008 global financial crisis, and the COVID-19 pandemic, investors should consider any downturns during election years with a grain of salt.
Remember, market volatility is temporary. Even during election years, short-term bouts of volatility are normal. Looking at the S&P 500’s long-term annual average return of 9.67% over the last 30 years, it’s clear the market eventually corrects and continues along its upward trajectory.²
Whether this election’s impact will follow historical patterns remains to be seen. We can never predict the market based on past performance, but we can prepare based on historical context.
Should You Brace Your Portfolio for Impact this Election Season?
If your portfolio is built based on a long-term investing strategy, you shouldn’t feel compelled to make changes based on short-term volatility. Stay the course and ride out any potential political storm with confidence in your portfolio and the advisory team behind you.
However, if you’re nearing retirement, you may be more comfortable confirming you have enough cash and cash equivalents available to ride out any short-term market disruption as a result of the election.
Want to discuss your portfolio and investing strategy in light of the upcoming 2024 elections? Don’t hesitate to reach out today.
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