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?
A historical look at presidential elections’ impact on the stock market
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:
- Democratic control of the White House and full Republican control of Congress.
- Democratic control of the White House and split party control of the Senate and House.
One scenario corresponded to positive absolute returns modestly below long-term average:
- Republican control of the White House and full Democratic control of Congress.