What Will the Stock Market Do as Election Nears?

In the heart of a political showdown, as the nation edges closer to the 2024 presidential face-off between Democratic incumbent Joe Biden and his Republican challenger, former President Donald Trump, a different kind of battleground is quietly brewing — the financial markets. Investors are aligning their sights not just on the political horizon, but on the ripples the election might send through the economic landscape.

As the election season unfolds and begins to dominate headlines and newscasts, investors may be tempted to adjust their portfolios to keep pace with the heated clashes and escalated rhetoric. But before taking any meaningful action, it’s important to view things through a historical lens to uncover layers of financial resilience that challenge the notion of election-year market volatility.

Historical stock market trends during presidential election years

The historical stock market trends during U.S. presidential election years reveal a fascinating interplay between politics and market performance, shedding light on strategic investment decisions and long-term financial planning. Since 1952, the S&P 500 has experienced an average gain of 7% during presidential election years, as reported in U.S. News & World Report, with this figure rising to 12.2% in years when a president is seeking re-election.

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Market predictions tied to election outcomes have shown a remarkable accuracy rate, with the stock market correctly predicting the presidential winner in 87% of cases since 1928, as highlighted by Forbes. A declining market prior to the election has often been an indicator of the incumbent party's defeat.

A report from BlackRock found that despite the political party in power, the stock market has maintained an average return of 11.6% during election years since 1926, slightly outperforming its overall average annual return. Interestingly, a T. Rowe Price report found that the year following a Democratic win sees an average market gain of 11.3%, compared to 6.6% after a Republican victory.

Election year volatility and investor behavior

Election years bring their own brand of market volatility, which tends to be lower on average, except in the immediate months before and after the election. Notably, the T. Rowe Price report found that market turbulence spikes if the incumbent party is expected to lose but usually stabilizes post-election.

The government's composition, whether under single-party control or a divided government, has varied impacts on market performance. While single-party dominance shows no significant correlation with market trends, according to a U.S. Bank report, a divided government has been statistically linked to market performance, providing evidence that the balance of power influences market dynamics more than the controlling party itself.

Long-term investment perspective during election cycles

Beyond the electoral cycle, economic indicators such as growth rates, interest rates, inflation and corporate earnings hold more sway over market returns than election outcomes. Therefore, while the election may cause more buzz and excitement, it is important for investors to focus on broader economic trends rather than short-term election-related noise, aligning with long-term strategic investment goals.

Historical data highlights the minimal long-term effects of elections on market performance, with the S&P 500 showing resilience and positive returns regardless of the electoral cycle. Economic and inflation trends consistently outweigh electoral outcomes, so it is wise to maintain a steady investment approach based on market fundamentals.

Investors should consider maintaining diversified strategies and avoid making hasty decisions based on short-term volatility, with long-term data reinforcing the value of adhering to a well-considered investment plan. This strategic focus on economic growth, interest rates, inflation and corporate earnings is critical to navigating the uncertainties of election cycles while pursuing long-term financial objectives. Despite the speculative fears and heightened discussions around the immediate impacts of election outcomes, the long-term influence on market performance remains marginal.

Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth.

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