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.