The 2024 U.S. presidential election is just around the corner, and history shows that election years can bring increased volatility to the stock market. As investors position themselves for potential policy changes and outcome uncertainty, they tend to react strongly to any political developments, leading to choppy trading.
Election Years Have Delivered Mixed Returns Historically
According to historical data analyzed by MarketWatch, the stock market has seen mixed performance during election years:
|S&P 500 Return
While some election years like 2020 and 2012 saw strong double-digit returns, others like 2000 and 2008 saw significant declines. According to analysts, this reflects the broader economic conditions and market dynamics during those years rather than the direct impact of the election.
However, within election years stocks have historically shown distinct pre- and post-election patterns:
- In the three months leading up to elections, the S&P 500 has averaged a paltry 0.5% gain as uncertainty climbs.
- In the two months following elections, stocks have surged about 3.5% on average as political uncertainty lifts.
Choppy January Signals Increased Volatility Ahead
So far in 2024, stocks have continued their choppy trend from December 2023. After a strong start to the year, fears of an economic slowdown and corporate earnings worries have erased some gains. The major indexes popped shortly after the new year on optimism over reopening plays, but declined last week on recession concerns.
As analysts from J.P. Morgan note, election years are prone to these kinds of sentiment swings from macro uncertainties. And with polls showing a close race between President Trump and challengers, stocks could see even greater volatility ahead.
Key events like debates, primary results, VP selections, and party conventions could all trigger market reactions in either direction. Even small gaffes or scandals that shape voter opinions can move markets.
Focus Shifts from Fed Policy to Fiscal Policy
While monetary policy and the Federal Reserve dominated market narratives in 2023, analysts predict attention will shift to fiscal policy as the election nears.
According to David Bahnsen, CIO of wealth manager The Bahnsen Group:
This election is hugely consequential when it comes to the regulatory and tax environment investors could face over the next four years. The two parties have very different economic visions, so the winning ideology will shape key policy decisions.
Areas like corporate taxes, health care, climate change legislation, and even tech and banking regulation could be significantly impacted by the election outcome. This policy uncertainty, rather than Fed actions, may drive markets more in the coming months.
Risks of Trade War and Populism Weigh On Multinationals
Geopolitical risks also loom large this election year. Tensions with China have escalated over trade policy, leading to fears of another technology and manufacturing trade war.
Meanwhile, populism has risen globally, with more extreme partisan positions gaining traction. Issues like immigration, globalization, and isolationism are seeing increased media coverage.
For multinational corporations and the technology sector, these risks pose significant challenges to revenue and earnings growth. As U.S. News writes, divisive rhetoric around trade and security could dent market confidence.
As a result, investors are advised to pay close attention to any trade or foreign policy comments that emerge during debates and campaign events this year. Hawkish stances could negatively impact sensitive sectors like emerging markets and tech stocks.
Historical Trends Signal Late-Year Rally Possible
While election years tend to increase market uncertainty and volatility, historical performance trends suggest stocks could see gains in the final months of 2024.
Analysis from Barron’s shows that the performance gap narrows dramatically in the late stages of an election year:
|Average S&P 500 Gain
|First 3 quarters
These outsized Q4 returns may result from clarity after the election, combined with seasonal strength from holiday consumer spending. There is also a historical precedent of incumbent presidents aiming to keep markets buoyant leading up to Election Day with business-friendly policies.
While past performance is no guarantee of future returns, investors speculate that the resolution of political uncertainty and potential fiscal stimulus could catalyze a year-end rally in 2024.
Positioning Portfolios to Balance Risks
For investors looking to navigate market volatility surrounding elections, analysts emphasize proper portfolio construction and risk management.
Rather than making outright bets on candidates, prudent strategies involve hedging around possible outcomes. These include:
- Maintaining globally diversified assets with muted political exposure
- Holding higher cash balances to deploy opportunistically
- Utilizing options contracts to limit downside risk
- Dynamically adjusting sector tilts as probabilities shift
Election years can undoubtedly increase market uncertainty and anxiety among investors. However, by focusing on fundamentals, diversifying broadly, and not overreacting to headlines, long-term investment theses can endure short-term political noise.
Staying invested through volatility has historically paid off for patient investors – regardless of who ultimately occupies the Oval Office.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.