Presidential election years bring a flood of political and emotional news headlines, with the potential to shake heads \u2014 and markets. But you don\u2019t have to let the noise catch you off guard. The more you know about how election years influence markets, the calmer you can be. <\/p>\n\n\n\n
Here are five market trends to watch for this election year \u2014 and what to know about them. <\/p>\n\n\n\n
Looking back in history, stocks have generally done well. Since 1926, they\u2019ve increased 11.6% annually<\/a> during election years. This is higher than the average market return of 10.3% over all years. <\/p>\n\n\n\n Historically, the market has followed this pattern: <\/p>\n\n\n\n The second half of the year has usually been better than the first half, but this may not always be the case.<\/p>\n\n\n\n Despite its positive returns, the S&P 500 has generally done better in non-election years, according to several sources.<\/p>\n\n\n\n The difference is about 0.50% lower<\/a> in election-year performance \u2014 for example, 11% in an election year vs 11.5% in a non-election year. Investors may move money into lower-risk assets during election season, which could account for some of the difference. <\/p>\n\n\n\n If investors reinvest the month after the election is determined, you could see short-term spikes or drops after Election Day. <\/p>\n\n\n\n Election year volatility comes from stock prices moving farther or faster than usual. <\/p>\n\n\n\n October already tends to see more market volatility nearly every year. But markets are most volatile 12 months before a presidential election and one month after. This comes from increased levels of uncertainty. Highly contested elections may cause further delays.<\/p>\n\n\n\n Generally, if the sitting president loses the election, markets have seen greater price swings. However, this impact fades over time.<\/p>\n\n\n\n An analysis<\/a> of 24 presidential elections found that the S&P 500 usually posts stronger returns \u2014 compared to non-election years \u2014 in the 6 months before Election Day. Then, the market declines somewhat during a president\u2019s first 12 months, regardless of who wins. <\/p>\n\n\n\n A practical reason for this trend is that over half of presidents see a recession in their first year. During recessions, companies make less money and more people lose their jobs. This tends to depress market prices. <\/p>\n\n\n\n In other words, the election itself may not be a main driver of markets. Instead, market prices might just be responding to economic conditions that occur during an election year. <\/p>\n\n\n\n A moderate-risk portfolio that includes 60% stocks and 40% bonds is a popular investment strategy.<\/p>\n\n\n\n Only four presidential election years posted negative returns<\/a> for this portfolio. Those years also corresponded to major events that likely had more impact than the election.<\/p>\n\n\n\n Over the long-run, average annual performance on the 60\/40 portfolio has been slightly higher during election years, at 8.7% compared to the average 8.5%. <\/p>\n\n\n\n Bear in mind that these trends, like market and economic trends, rely on past experience. Of course, past performance doesn\u2019t guarantee future results. Each era brings different challenges and opportunities. There\u2019s no guarantee any of these will (or won\u2019t) come to pass, especially in our unique political landscape.<\/p>\n\n\n\n A few factors that set this election year apart include:<\/p>\n\n\n\n Past market trends point to good news for long-term investors, but they\u2019re not set in stone. Here\u2019s what you should know about these trends \u2014 however they pan out. <\/p>\n\n\n\n Historically, the Federal Reserve hasn\u2019t been shy<\/a> about raising or lowering interest rates during election years. Higher rates can fight inflation by raising borrowing costs. Lower rates can encourage economic growth by making borrowing more affordable. In fact, since 1956, the Fed has raised or lowered rates during every election except 2012. <\/p>\n\n\n\n It\u2019s possible the Fed could move rates again in 2024 as it continues to battle pandemic-related inflation. Though, as inflation continues to cool, it\u2019s likely to lower rates, not raise them. Those lower rates would likely boost markets short-term. <\/p>\n\n\n\n Presidents seeking reelection for their party often \u201cprime the pump.\u201d This means putting policies in place to encourage economic growth or lower unemployment before elections. <\/p>\n\n\n\n However, the current president has few remaining opportunities to significantly boost the economy. First, the other party controls part of Congress. This makes passing new laws difficult. Second, given how policies \u201clag,\u201d there\u2019s little time for the incumbent to pass meaningful change before Election Day. Policy lag describes the time it takes for new policies to \u201ckick in,\u201d or start impacting target goals.<\/p>\n\n\n\n That said, most of the spending from the 2022 Inflation Reduction Act is planned for 2024 to 2026, and the 2022 CHIPS and Science Act of 2022 provided billions for the American semiconductor industry. Both provide support for the economy and the market. <\/p>\n\n\n\n One \u201csecret\u201d truth of presidential elections is that they might not matter for your long-term portfolio. In fact, U.S. Bank data<\/a> shows that there\u2019s no statistically significant relationship between who wins the White House and how the S&P 500 performs. That means the election outcome and the market\u2019s performance aren\u2019t strongly connected. <\/p>\n\n\n\n Instead, the balance of power is what matters:<\/p>\n\n\n\n However, the S&P 500 does seem to perform better<\/a> when an incumbent president runs for re-election. Investors may expect fewer changes in policy, and markets prefer stability. <\/p>\n\n\n\n It\u2019s easy for voters to give presidents \u2014 past, present, or future \u2014 credit or blame for economic and market performance. But wanting to assign a reason ignores an important truth:<\/p>\n\n\n\n It takes more than one person, even if it\u2019s the president, to shift an entire market long-term. And long-term movements drive lasting financial gains. <\/p>\n\n\n\n So, if presidential elections don\u2019t move markets, what does?<\/p>\n\n\n\n The answer: economic factors<\/a>. <\/p>\n\n\n\n Ultimately, who wins the White House matters less to markets than how the economy performs. When markets fall before or after elections, it\u2019s rarely because of the political race, or even the outcome. Instead, prices tend to follow economic factors like:<\/p>\n\n\n\n In short: while elections might be more exciting, the economy drives markets. <\/p>\n\n\n\n If you\u2019d invested in the S&P 500 in 1926, you would have earned a total return of 1,456,754% <\/a>\u2014 assuming you also reinvested any dividends paid. During that time, the U.S. has fought multiple wars, changed party control multiple times, and weathered multiple recessions. You would have lost out on substantial gains if you invested only during Republican-led years or Democrat-led years.<\/p>\n\n\n\n In other words, you\u2019ll probably see better returns just by staying put, regardless of the political landscape. As the saying goes, it\u2019s time in<\/em> the market, not timing<\/em> the market, that generates long-term gains. (Also, diversify<\/a>. Set up an emergency fund. And align the life you\u2019re living to your goals.) <\/p>\n\n\n\n\n
2. Annual returns may be slightly below average <\/h3>\n\n\n\n
3. Higher volatility before and after Election Day<\/h3>\n\n\n\n
4. Post-election blues<\/h3>\n\n\n\n
5. Minimal impact on moderate portfolios<\/h3>\n\n\n\n
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Past performance doesn\u2019t guarantee future results <\/h2>\n\n\n\n
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4 takeaways for markets in the 2024 election year <\/h2>\n\n\n\n
The Fed may still move interest rates<\/h3>\n\n\n\n
Sitting presidents try to spark growth<\/h3>\n\n\n\n
Who wins may not matter<\/h3>\n\n\n\n
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Follow the economy<\/h3>\n\n\n\n
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Time in market matters more<\/h2>\n\n\n\n