Key takeaways
With primaries and caucuses now complete in more than two-thirds of states, the major party’s 2024 candidates appear set.
President Joe Biden and former President Donald Trump are on track to accept their respective party’s nomination this summer.
It’s important to maintain a proper perspective when assessing the potential impact elections can have on capital markets and your investments.
Although the Presidential primary season won’t finish until June, the presumptive nominees for the Democratic and Republican parties are set. Democratic President Joe Biden, after facing minimal opposition, will seek re-election in November as his party’s standard bearer. Republican former President Donald Trump significantly outpaced several candidates in early primaries to quickly secure enough delegates to win his party’s nomination. The stage is set for a rematch of 2020’s race for the White House. The candidates are expected to be named official nominees following party conventions this summer. The Republican convention takes place in mid-July. The Democratic convention occurs in mid-August.
Along with keeping a close eye on the 2024 presidential contest, investors will also be eyeing races for the U.S. Senate and U.S. House of Representatives. Democrats currently hold an effective two-seat majority in the Senate, with one-third of the seats up for election in November. Republicans currently hold a very narrow majority in the House, with all seats up for election this year. To this point, based on polling, it seems difficult to predict the likely outcome for control of the White House or Congress.
Election results can ultimately impact government policy, laws and foreign relations. But how do those results influence capital markets? And what are the potential ramifications for you as an investor? To better address this question, U.S. Bank investment strategists studied market data from the past 75 years and identified patterns that repeated themselves during election cycles.
The analysis points to minimal impact on financial market performance in the medium to long term based on potential election outcomes. The data also shows that market returns are typically more dependent on economic and inflation trends rather than election results.
What may be more important to investors is what the parties represent. “Party platforms, which are hammered out at this summer’s national conventions, often tell the markets more important information than the name of the winner or loser of the general election,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Investors will try to determine which party is likely to be in power, and how that will benefit particular industry sectors of the market.”
Current polls indicate that, not unlike the elections of 2016 and 2020, we can expect a tight presidential contest ahead. Keeping in mind that the race is decided by electoral college votes, Trump currently holds a modest lead over Biden in most of what are considered “battleground” states, the ones that could tip the balance of the election, with the candidates in a virtual dead heat in a number of those states.1 However, it’s important to keep in mind that electoral dynamics could change prior to election day on November 5, 2024.
How have election outcomes affected market performance in the past and how might potential scenarios play out in the 2024 presidential election?
U.S. Bank investment strategists reviewed market data going back to 1948. Using average 3-month returns following each election outcome—and comparing those with the average 3-month return during the full analysis history—strategists calculated the statistical significance of the relationship between political control and market performance using a calculation called a t-statistic, or t-test.
A t-test determines whether one group of variables (in this case, the political composition of the White House and Congress) has a measurable effect on another variable (in this case, average three-month S&P 5002 returns during the control period).
The analysis also looked at the exact periods of time when parties took control of different branches of government (rather than starting from election dates themselves), although this analysis resulted in similar outputs and conclusions.
Results of the analysis contradict conventional wisdom that a Republican or Democratic “sweep” of the presidency and Congress is most likely to cause market disruption. In fact, historically there has not been a statistically significant relationship between single-party control of both the White House and Congress and market performance.
Rather, the data uncovered three divided-government outcomes with a statistically significant relationship to market performance.
Two scenarios corresponded to positive absolute returns in excess of long-term average returns:
One scenario corresponded to positive absolute returns modestly below long-term average:
While investors may closely monitor election results for their potential effect on stock market performance, it’s important to recognize that other factors that may have greater impact on their portfolios. The historical data suggests that economic and inflation trends, more so than election outcomes, tend to have a stronger, more consistent relationship with market returns.
The historical data suggests that economic and inflation trends, more so than election outcomes, tend to have a stronger, more consistent relationship with market returns.
In general, rising economic growth and falling inflation have been associated with returns that are considered above long-term averages, while falling growth and rising inflation have corresponded to positive but below average market returns. For investors, staying focused on these patterns is probably more insightful than potential election outcomes when it comes to forecasting market performance.
When looking at midterm election data (elections held in between presidential elections), U.S. Bank investment strategists found that the S&P 500 consistently outperformed in the year after midterms compared with non-midterm years. Just like presidential elections, which party controls Congress generally was not a factor in projecting overall equity market performance.
These equity and bond market trends were consistent over time unless there was a dramatic disruption. Read more about how midterm elections affect the stock market.
While the analysis doesn’t point to elections having a meaningful medium-to-long-term market impact, they could affect individual sectors and industries. Different election outcomes have the potential to affect proposed policies, regulations, or global conflicts.
The following are policy issues to monitor throughout the presidential nomination and election process:
In any election, there’s also the potential for delays in verifying an election victor, particularly in closely contested races. At the presidential level, this occurred in both the 2000 election (settled with a Supreme Court verdict) and 2020 election (when the result was challenged by one candidate). In these instances, ensuing delays could lead to more uncertain election outcomes, in which case riskier asset classes might decline until clarity emerges.
The Biden-Trump presidential rematch appears set, awaiting final confirmation that will occur at the Democratic and Republican party conventions this summer. The composition and control of Congress resulting from the 2024 election is still up in the air but is another aspect of this year’s election cycle that bears consideration. It also makes sense to keep an eye on which sectors are most likely to be affected by the potential for key policy changes. Despite the constant headlines revolving around elections, investors are well served to remain focused on factors such as economic growth, interest rates, inflation and corporate earnings when making portfolio decisions.
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Historically, there does not seem to be a clear connection between the outcome of a Presidential election and capital market performance in the medium- to long-term. Two scenarios corresponded to positive absolute returns in excess of long-term average returns – Democratic control of the White House and full Republican control of Congress; or Democratic control of the White House and split control of the Senate and House. One scenario corresponded to positive absolute returns modestly below long-term averages – Republican control of the White House and full Democratic control of Congress.
There doesn’t seem to be a direct link between the occurrence of an election year and market outcomes. The stock market, as measured by the S&P 500, was down in three of the 16 presidential election years since 1960. It experienced negative returns in seven of the 16 non-presidential election years. Typically, other factors such as the state of the economy, interest rates, inflation and corporate profits have a greater bearing on broad stock market performance.
It’s important for investors to avoid anticipating election outcomes, the potential impact of those projected outcomes, or actual election results. Investors should discuss their current portfolio positioning with their financial professional, and determine, by assessing all factors, including changes in personal circumstances and economic and market developments, whether any changes are appropriate.
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