Today’s shifting market dynamics

Wednesday, March 6 at 1:00 pm CT

Join this live event featuring U.S. Bank senior investment strategy and wealth planning leaders who will offer valuable insights to help you navigate evolving capital market considerations.

Key takeaways

  • The presidential primary season is underway, with much attention focused on the race for the Republican presidential nomination.

  • However, capital markets are not yet paying close attention to primary season or speculating on the potential outcome of November’s general election.

  • A review of historical data indicates that there’s little correlation between national election outcomes and capital market performance.

In the early stages of the 2024 presidential election cycle, the nominees for both the Democratic and Republican parties appear to be known already. Incumbent Democratic President Joe Biden faces minimal opposition on his way to the party’s endorsement – winning early symbolic victories in Iowa and New Hampshire. On the Republican side, former President Donald Trump looks on track to secure his party’s nomination, winning handily in both Iowa and New Hampshire as well. Most of Trump’s Republican primary challengers have now dropped out of the race and endorsed his candidacy.

Election results can ultimately impact government policy, laws and foreign relations. But how do those results affect the market? 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.

However, there are a few election scenarios that were associated with the potential for a slight impact on market performance. 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 5001 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 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.
Visual highlighting how Democratic control of the White House and either a full Republican control of Congress or split control of Congress corresponded with positive absolute returns in excess of long-term average returns. Alternatively, Republican control of the White House and full Democratic control of Congress corresponded to positive absolute returns modestly below long-term average returns.
Source: U.S. Bank Asset Management Group.

Historical economic and inflation trends and market performance

While investors may closely monitor election results for their potential effect on stock market performance, it’s important to recognize that other factors that might have a 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 predicting market performance.

Visual highlighting how rising growth and falling inflation have been associated with returns that are considered above long-term averages, and falling growth and rising inflation have been associated with below average market returns.
Source: U.S. Bank Asset Management Group.

Stock market performance in midterm election years

When looking at midterm election data (elections held in between presidential elections), 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.


Specific stock market sectors and key policy issues to watch in election years

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:

  • Individual and corporate tax policies, including state and local income tax (SALT) deductions
  • Spending priorities, such as energy, infrastructure and defense
  • Healthcare
  • Regulation
  • Immigration policy
  • China (trade and Taiwan)
  • Geopolitical conflicts (Russia/Ukraine, Israel/Hamas)

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.


Looking to the 2024 presidential election and post-election period

While not yet cast in stone, the potential of a Biden-Trump rematch in 2024’s presidential race appears likely. 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 cycle that bears consideration. It also makes sense to keep an eye on which sectors are most likely to be affected by key policy changes. While the presidential election will likely dominate news headlines in 2024, keep in mind the general election on November 5 is still many months away. Investors are well served to remain focused on factors such as economic growth, interest rates, inflation and corporate earnings when making portfolio decisions.

Download our white paper for more detailed analysis on the 2024 presidential election and stay up to date on the latest market news and activity.

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