Investing in an Election Year

The first quarter of 2024 is in the books, and it was a better start to the year than most investors expected.  Artificial Intelligence (AI) stocks, bank stocks, and dividend stocks pushed equities higher.  The “AI 5” made up of NVIDIA, Microsoft, AMD, Taiwan Semi, and Broadcom together averaged a positive 33.5% return in the first quarter.  In an interesting combination of positivity, the S&P 500 eclipsed an all-time high and added 10.2% in Q1, its best first quarter since 2019, gold hit an all-time high, and money market assets remained near an all-time high of $6 trillion as some high yield savings flirt with 5% interest.

But just one month later, as I write this article at the close of April, investors have seen volatility reenter the equation.  The S&P 500 is down roughly 3.5% from 04/01-04/30, and headlines touting lingering inflation, slowing GDP growth, and spreading conflict in the Middle East have investors nervous again.  The likely culprit for the recent market pullback is the same conductor it has been for the past few years, the Fed.  Federal Reserve Chair Jerome Powell signaled on April 16 that it could take longer to get inflation towards their target rate of 2% and rate cuts may not come as soon as expected unless the labor market should soften.

What can’t be forgotten amid the day-to-day news flashes, economic data, or Fed commentary, is the fact that we are in an election year.  Presidents Joe Biden and Donald Trump are set to break their own record as the two oldest presidential candidates in history, currently at 81-years-old and 77-years-old respectively.  Biden seems to be parting from his far left base and shifting closer to the center by getting tough on China through tripling tariffs on Chinese steel, providing “ironclad” support to Israel, and increasing southern border security.  It’s no coincidence he’s reaching back out to young voters by releasing a formal proposal for student loan debt relief that looks very similar to his plan that was shut down by the Supreme Court last year.  Meanwhile, Trump is arguably hogging more limelight each week in dealing with many of the same legal battles talked about during his presidency.  Politicians are meant to politic and will surely blame any economic dip between now and November on the other side while taking credit for any market rallies we might see.

The candidates’ rhetoric over the next six months is unlikely to sway the markets like the Fed can, and there’s not much time left for meaningful policy enactment, but history can give investors a trend to consider.  But first, as any financial professional must attest, past performance cannot guarantee future results.

There have been 24 elections since the S&P 500 Index was created, and 20 of those years have provided a positive return.  2024 offers a unique case study in that investors can review data for years in which both candidates already became president.  In 2020 when Biden won, the S&P 500 returned 18.40%.  When Trump won in 2016, the S&P 500 returned 12%.  The most recent negative election year happened in 2008 when Obama was first elected during the Great Recession.  This was the worst election year since the index has been tracked as the S&P 500 fell -37.0%.  The best election year in S&P 500 history was in 1928 when Herbert Hoover won, the index saw a 43.6% return.  However, we all know what happened the following year.

History shows the stock market has performed better in years in which a Republican was elected.  The average election year return when a Republican wins the White House has been 15.3%, versus 9% when a Democrat was elected.  It’s important to remember that election day is November 5, meaning the stock market has less than two months to digest the election outcome.  However, as a leading economic indicator, some stock market movement could be credited to the expected winner and his campaign promises.

Putting Republican and Democrat aside, since 1952, the S&P 500 has averaged a gain of 7% during presidential election years.  While not bad, this is far from the 16.8% average the index returns in the year prior to an election year.  2023 reinforced this trend as the S&P500 rallied 24% last year.

Investors can take some comfort in that presidents seeking re-election may do all that’s within their power to pump up the stock market through fiscal stimulus and pro-growth regulation.  The Fed is usually active in election years, having hiked or cut rates in every election year since 1980, except for in 2012.  This may play to Biden’s benefit as rate cuts are largely expected to take place later this year.  A rallying stock market may not guarantee a reelection victory, but a crashing stock market can certainly ruin it.

*Stock Market Data Source: Morningstar / Ibbotson Associates. 

** This material is for general information only and is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.  Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.  Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. 

Written by Bryan Kuderna.

Have you read?
Best Fashion Schools. Best Universities. Best Medical Schools. Best International High Schools. Countries: Most Female Billionaires.