It is no secret. It is an election year and investors expect the Presidential Election in November to be the market moving event of 2024. While both major parties have completed their primaries, neither race was close. Democratic incumbent Joe Biden and Republican Donald Trump quickly earned enough delegates to become the presumptive nominees of their respective parties. Barring any extraordinary developments, the 2024 presidential race will be a rematch of the 2020 election.
In historical terms, Trump’s nomination is unusual in that previously unsuccessful nominees generally do not get another shot to represent their party. The last time that happened was in 1968, when Republicans chose Richard Nixon, who had lost to John F. Kennedy in 1960. Should a Biden-Trump sequel come to fruition, it would be the seventh presidential rematch in U.S. history, and the first since the 1950s.
The potential for short-term volatility because of the Election may be challenging on the psyche of long-term investors. History has shown that staying invested and sticking to your long-term plan during election years can be a successful strategy.
Based on research from Blackrock, and contrary to what some investors may think, presidential election years have been better than the average market year, returning an annualized 11.6% vs. 10.3% since 1926.
(1)
Figure 1: U.S. Stocks Across the Election Cycle
The Presidential Election is only one of many factors that influence the stock market during election years, but analysts say there is good reason for investors to expect good market performance in re-election years like 2024.
Presidents seeking re-election will often "prime the pump" by implementing stimulus measures and pro-growth regulatory policies to support the economy and the labor market. The President can also use emotional and social measures such as forgiving billions of dollars of student loan debt to secure a vote. The bully pulpit can be a serious force to run against.
Since 1926 the chances of a year-end loss in the S&P 500 is less in an election year. Figure 2 shows that since 1926 the S&P 500 was down only 17% of the time, compared to 30% of the time in non-election years. Experts attribute this to the general optimism of both Americans and investors that the next President can turn a new leaf. Regardless of whether an incumbent hangs on for re-election or there is a change at the podium, the President will focus much attention on the economy and its impact on American lives. If stomachs and wallets are full, there will be fewer upset villagers.
(2)
Figure 2: U.S. Stocks Have Tended to Lose Money Less Often in Election Years
At the end of the day, passionate advocates from both sides of the political aisle would like to think their party’s candidate is better for the stock market. Again, facts show this to be far from the truth. As can be seen in Figure 3, the long-term trend of the stock market has been a steady increase regardless of the party in charge or the President at the podium. (3)
Figure 3: Cumulative Return in the S&P 500 Under Democratic and Republican Presidents
Interest rates are currently at their highest level in more than two decades as the Federal Reserve continues its battle with inflation.
Elevated interest rates increase borrowing costs for consumers and businesses, weighing on and restricting economic growth.
In our opinion, high interest rates, persistent inflation and sluggish economic growth are all headwinds for President Biden. With the Federal Reserve probably bending over backwards to not appear as a political pawn, coupled with persistent inflation, we expect restrictive monetary policy to persist with no more than one 0.25% rate cut before Election Day.
At WT Wealth Management and from our review of 30 different and unique pieces of economic statistics via our
Bull/Bear Short-Term Sentiment Indicator, we are starting to see the first cracks in the economy as a result of the Fed tightening cycle. We are witnessing deteriorating consumer sentiment, slowing job growth, job openings declining and Gross Domestic Product (GDP) having its weakest report in Q1 2024 since Q1 2022.
(3)
President Biden may have limited opportunities to add economic stimulus measures in 2024, as Republicans control the House of Representatives and are unlikely to cooperate. However, much of the spending from the 2022 Inflation Reduction Act is slated for fiscal years 2024 through 2026, which could help support the economy and the stock market this election year.
The facts are the facts. Past Election years have generated good returns and have had less drawdowns going all the way back to 1926. At WT Wealth Management, we are bullish on facts and bearish on hunches. Successful investors have plans and stick to them regardless of perceived risks from short-lived geopolitical events.
Sources
- What Should Investors Expect From The Market This Election Cycle?
Forbes.com
- How the U.S. election may impact your portfolio
Blackrock.com
- United States GDP Annual Growth Rate
TradingEconomics.com
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