October Election Update

October 14, 2024

Watch Politics and Your Portfolio: Investing in an Election Year

 

Key Takeaways:

  • Election Uncertainty: The upcoming presidential election features a close race between Donald Trump and Kamala Harris, but political uncertainty has yet to derail the S&P 500.
  • Historical Market Behavior: Typical election years feature stock volatility that peaks just before the election and normalizes afterward, allowing markets to refocus on fundamentals.
  • Labor Market Concerns: Despite stocks trading near all-time highs, there are signs of deterioration in the US labor market that investors are closely following.
  • Predictive Indicators: Stock returns and dollar movements prior to elections can serve as presidential election indicators, and the final 30 days before elections tend to be the most telling.
  • Fundamentals Over Politics: Economic fundamentals are much more important to stock returns than political outcomes. Over time, stocks tend to rise regardless of which party holds office.

 

The upcoming presidential election is less than a month away, and the race between Donald Trump and Kamala Harris remains razor-thin. As of October 2nd, RealClearPolitics’ betting average shows each candidate with an equal chance of winning the nation’s highest office. Ultimately, the decision may hinge on just a few thousand votes in key swing states.

Surprisingly, markets have largely brushed off this political uncertainty. The S&P 500 has been quietly setting record highs and finished September with its best year-to-date performance at the end of September since 1997.

Markets During Normal Election Years

In most election years, stock volatility typically increases in the months leading up to the presidential election as investors speculate about the potential impact of new leadership and changing policies on taxes, regulations, and trade agreements. However, this volatility is often short-lived, with markets stabilizing once the election dust settles. Regardless of which party takes office, investors refocus on the fundamentals that drive long-term performance: corporate earnings, economic growth, interest rates, and consumer spending. This return to normalcy frequently leads to a post-election rally as markets regain stability and start reflecting actual economic conditions rather than political speculation.

So far this election cycle, volatility has remained muted. However, October tends to be the most volatile month during election years as uncertainty peaks.

Markets During 2024’s Election Cycle

Typically, our key message to clients is that markets follow fundamentals, and short-term noise from presidential elections has little impact on market trajectories. However, we are currently digesting unsavory economic data that may indicate changing fundamentals—not for the better. Last month, we noted signs of deterioration in the US labor market, a key factor behind the Fed’s decision to cut rates by 0.50% in September.

Despite weaker jobs data, the stock market rally continues, as investors expect the Fed to achieve an economic “soft landing.” This narrative may not hold if the labor market shows continued signs of weakness, so markets will be sure to closely monitor jobs data in the coming months. Further job deterioration could lead to a market sell-off as investors grapple with the implications for consumer spending, corporate earnings, and recession risks.

Our key message to investors is that the economy’s trajectory is already set. The US economy functions like an oil tanker steered by a small rudder—it takes time for policymaker actions to take effect. The Fed is just beginning to see the delayed effects of tight monetary policy on labor markets, more than two years after hiking interest rates. Whether or not the US economy is headed for recession—the only real factor that matters for capital markets—remains unrelated to the outcomes of the upcoming election.

Political Outcomes Don’t Drive Stock Prices…But is the Reverse True?

While political outcomes have minimal effect on stock returns, history suggests that stock movements can exhibit predictive power regarding election outcomes. Strong stock returns leading up to November typically correlate with incumbent victories, as stock markets serve as forward-looking economic indicators. Presidents presiding over strong economies tend to be reelected. Conversely, higher stock volatility often signals a victory for the challenger.

The US dollar is another significant predictor of presidential elections. A weakening dollar in the months before an election usually favors the incumbent, while a strengthening dollar tends to benefit the challenger. This relationship may seem counterintuitive; after all, a strong dollar typically reflects good economic conditions, whereas a weak dollar indicates economic challenges. However, viewing this trend through the lens of inflation can clarify the dynamics. When inflation runs high due to an overheating economy, the Fed is prompted to raise rates to combat rising prices. These higher rates often coincide with a stronger dollar, suggesting that votes for a challenger during periods of dollar strength may reflect dissatisfaction with inflation.

Alternatively, fluctuations in the dollar may indicate which candidate markets believe is more likely to win. If investors anticipate a challenger’s victory, the dollar might rise in expectation of policy changes that could boost the economy.

The charts above illustrate historical trends; we are not predicting a specific outcome for the November election. With President Biden having dropped out of the race, there is no true “incumbent” this time around, meaning historical patterns may not fully apply. Nonetheless, the next month will be an important one for stock and currency markets, as the final 30 days leading up to an election are often the most eventful and indicative of the results.

Regardless of which party wins, we will provide our clients with investment advice informed by economic fundamentals and the implications of executive policies.

Key Takeaways Heading into November

As we approach another election cycle, investors naturally feel anxious about how outcomes might impact their portfolios. It’s common to wonder whether political shifts will lead to market upheaval or whether a particular candidate’s policies will boost or depress certain sectors. While politics can create short-term market swings, markets are influenced by a broad range of factors—many unrelated to who holds office. Factors such as global trade, technological innovation, monetary policy, and consumer trends significantly shape long-term market performance.

It’s crucial to recognize that policy changes are rarely swift or dramatic. Even if a new administration brings shifts in fiscal or regulatory policy, such changes are typically implemented gradually, often tempered by Congress, the courts, and the broader economic environment. The market adapts accordingly, finding a new equilibrium.

Historical data does not support the notion that one party is “better” for market returns. The S&P 500 has historically averaged positive returns under nearly every partisan combination, even in election years. Since 1932, the S&P 500 has risen an average of 7.12 percent in election years. In fact, evidence suggests that divided government correlates with stronger market returns, potentially due to reduced policy uncertainty.

What Should Investors Do?

For most investors, the best strategy is to avoid impulsive decisions based on political headlines. Timing the market in response to political events is risky and can lead to poor long-term outcomes.

Instead, focus on the basics: diversify your portfolio, align with your long-term financial goals, and monitor fundamentals rather than political noise. Ensure you have adequate cash on hand to fund near-term investment goals. Take this as an opportunity to call your advisor to ensure your investments are properly positioned in the context of your broader financial plan. Remember, the market’s reaction to elections is typically short-lived, and over time, markets tend to rise.

 

The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Past Performance does not guarantee future results.