Navigating Stock Markets Through Presidential Election Cycles
By Vaughn Woods, CFP, MBA
The political and financial worlds often collide, and nowhere is this more visible than in the lead-up to a presidential election. As the pressure cooker of the upcoming presidential election heats up, the stock market becomes a hotbed of speculation, mirroring and amplifying public sentiment about potential outcomes.
For investors, understanding this connection is crucial, but what does the data reveal about market performance during these pivotal periods?
A Brief History of Market Moods
In the year before the top office changes hands, the stock market can reflect a wide range of responses, from bullish exuberance to bearish turmoil. Historical data from the S&P 500 Index provides a comprehensive look at market behavior since its inception. Of the 23 election years documented, 19 recorded expansionary economic growth, serving as a testament to the resilience of the market against a backdrop of political change. Economic prosperity doesn’t guarantee re-election. Historically, several presidents like John Adams, John Quincy Adams, and Jimmy Carter lost their bids despite economic expansions.
Election years represent a notable juncture when financial strategies are often under scrutiny. It’s a time of amplification for policy discussions, past and present, and of emerging risks, and unprecedented possibilities. For the investors of each era, the stock market has been both an ally and a foe, presenting a rollercoaster of opportunities and challenges.
The Incumbent Conundrum
When an incumbent president is behind in the polls, historical data suggests that the market can become more volatile. The fact that it hasn’t shown up yet is no assurance it won’t in the next few months. The potential for policy disruption and the uncertainty of an administrative change can translate into fluctuations that investors may find unsettling.
This season of heightened uncertainty can prompt more conservative approaches as investors adopt a wait-and-see posture. Yet, as the data show, almost four out of every five election years generate positive returns. Hence the paradox: while the road leading to November might be bumpy, the journey through the year’s financial landscape often holds rewards for those who maintain a steady course.
Political Handover and Market Returns
The expectation that the stock market will perform better in the year following the election stems from the notion of political clarity and the hope for policy continuity. Here the numbers are revealed. Throughout history when a new president is elected the market is up on average some 9.3%. When an incumbent wins the presidency for a second term, the market is up some 13.4% throughout history. Moreover, stocks tend to perform better in an election year than the year following the election. For international equities the opposite has been the case.
These figures underscore the market’s appetite for the familiar and the positive history of market performance with party incumbency. Regardless of political alignment, the consistency in these numbers is a testament to the market’s adaptability and the resilience of investor sentiment in the face of change.
2024 and Beyond: Preparing for Elections and Markets
As the next Presidential election looms, investors must filter out the noise and focus on the core elements of their financial strategy. For those with a long-term perspective, the election cycle can be a test of patience amidst the flurry of predictions and prognostications.
While each election cycle is unique, historical trends can offer guidance for portfolio decision-making. Diversification, risk management, and a clear investment horizon are principles that stand the test of time. With the clarity of historical performance as a backdrop, investors can navigate the election cycle with an informed, steady hand, albeit with the possibility of a black-swan event (9/11/2001, 12/7/1941) ever present.
As of February 2024, with polls showing the Republican candidate leading, some analysts have already begun to point to the ouster of the incumbent as a market-anchoring event leading to lower volatility. However, it’s still early. Sudden shifts in sentiment can quickly change the volatility landscape. The S&P 500 now trades at a forward price-to-earnings ratio of twenty. In part, this is because S&P 500 earnings estimates are estimated to be up 6.8% for Q1 2024, 10.0% for Q2 and 9.0% for Q3 of 2024. For Q4 2024, analysts are projecting earnings growth of 18.2%. In part, this is due to expectations the Fed will lower interest rates later this year.
We shall see. For prudent asset allocation in 2024, diversification of your portfolio remains paramount, as we anticipate periods of high volatility between today and election day, Tuesday, November 5th, 2024.
Thank you for your referrals,
Vaughn L. Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
858-454-6900
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter are those of Vaughn Woods and Vaughn Woods Financial Group and may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0296.
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