Elections often elicit concerns among investors. This year should have plenty in store to frighten the wary.

Don’t Panic. It’s Just Another Election.

Key Takeaways

  • 2024 is a record-breaking election year, with about 25% of the global population hitting the voting polls.
  • Election cycles tend to stir fear among investors, but history suggests that markets will navigate past the uncertainty.

Elections often elicit concerns among investors. This year should have plenty in store to frighten the wary. According to The Center for American Progress, a U.S. Policy Institute, more than 2 billion voters (about 25% of the global population) from 50 countries are expected to hit the polls in 2024. Thus far, the concluded and upcoming elections have grabbed the attention of people all over the world.

Coming out of 2023, we witnessed a surprise outcome in Argentina with libertarian Javier Milei prevailing over the country’s long-entrenched Peronist rule. In January, Taiwan elected pro-independence Lai Ching-te to the presidency, maintaining the status quo of the contentious relationship between the island nation and the People’s Republic of China. India, whose economy has been a shining star among established and emerging countries, saw its general elections conclude, cementing a third term for Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP). Claudia Sheinbaum was decisively elected as Mexico’s first female president. Mexico is the largest national trading partner of the U.S. so any policy shifts implemented by Sheinbaum could have material impacts on our economy. European Union Parliamentary election results have shifted political dynamics in key countries, like France and Germany. In response, French President Emmanuel Macron has dissolved parliament and called for snap elections. It now seems Paris will be host to political gamesmanship in addition to 2024’s Olympic Games this summer. Not to be outdone, United Kingdom Prime Minister Rishi Sunak called for a snap election in July, seen by many as a last-ditch effort to keep Tories in power.

With all this election activity overseas, it begs the question – what impact will U.S. elections have on markets and the global economy more broadly?

U.S. Elections & Markets: Much Ado About Nothing

At home in the United States, all signs now point toward a rematch of the 2020 U.S. Presidential election with voters again deciding between President Joe Biden and former President, Donald Trump. As if this hotly contested Presidential election was not enough, all 435 seats in the U.S. House of Representatives are up for grabs with 23 considered toss-ups, that could determine the chamber’s majority while the U.S. Senate will see 34 seats put to vote with three falling in the toss-up category1.

There is no doubt that elections have consequences and accompanying policy changes can impact markets. At stake are issues like spending priorities, healthcare, immigration, and navigating geopolitical conflicts. However, it is often found that the impacts of such policy changes are limited to sector or industry levels while typically having little significant impact for the broader market2. Tax policy will come into play as the 2017 Tax Cuts and Jobs Act is slated to sunset in 2025. Its expiration or extension will determine whether households and companies will continue to see lower marginal tax brackets, higher standard deductions, and lower corporate income taxes. Also noteworthy is the election impact, or lack thereof, on U.S. federal deficit and debt spending, which continues to be a fiercely debated topic. It seems that regardless of what side of the aisle politicians sit, the propensity to fund spending with additional debt trumps inclinations toward fiscal restraint. With Congressional Budget Office (CBO) projections pointing toward $50.7 trillion in 20343, a ~94% increase from FY2023, upward pressure on U.S. Treasury yields may well persist, election outcomes aside.

In addition to a seemingly bipartisan fiscal spending policy, we see both sides of the aisle advocating for restrictive trade policy toward China. For instance, in April President Biden called on the U.S. Trade Representative to triple certain tariffs on Chinese steel and aluminum, echoing a 2018 proposal that was implemented by the Administration of his opposing Republican predecessor. The bipartisan policy stance on China tariffs led to a meaningful economic and market impact that resulted in a noticeable retrenchment in economic activity and contributed to the inversion of MTC Market Musings Thematic investment perspectives on economic and market developments June 26, 2024 the U.S. Treasury yield curve. Restrictions in global trade have the power to move markets and such a dynamic should be incorporated in portfolio construction.

Despite politics having the effect of pulling the country in different directions, markets have historically moved in one direction following election cycles: up. Looking back, we see that 84% of the time Democrats have held the Whitehouse, the S&P 500 has seen positive returns. Republican presidents have enjoyed similar results: 73% of the time Republicans have been in office, the index has enjoyed positive returns4. Excluding the Global Financial Crisis of 2008, the median return for the S&P 500 during an election year was ~10%4, a figure largely in line with a median of ~11% for all years going back to 1948. The exclusion of 2008 as an outlier may give readers pause but it demonstrates a broader truth concerning markets and elections: economic fundamentals play a more important role in market returns than do election outcomes (see chart)4. Interestingly, the average election year return demonstrates seasonality, with the bulk of that return realized in the second half of the year as more clarity on the election outcome emerges4.

S&P 500 Index Performance During Presidential Election Years (1948-2020)

Analysis of varying election outcomes over the years finds that the majority of the time, their impact on S&P 500 returns is not statistically significant. Alternatively, the same analysis applied to varying economic regimes as measured by rising/falling growth and inflation demonstrates statistical significance for all iterations2. Though partisans may seek to attribute market returns to the political persuasions of those in office, it appears more likely that the market is politically agnostic, deriving valuations from economic fundamentals as opposed to the mix of donkeys and elephants in Washington.

Investing Amid Political Uncertainty

How do these insights impact portfolio construction? We certainly would not advocate attempting to allocate at the sector or industry level based on presumptions of an election outcome nor would we advocate trading election year seasonality. The strategic allocations we set for clients are built on income and capital growth over a long-term horizon. While we make tactical allocation changes as the economic landscape and market fundamentals shift, election cycles generally would not warrant a pronounced deviation from our time-tested and strategic investment strategy. We expect 2024’s political landscape to take us for a wild ride, but we take solace in the fact that the positive returns exhibited during election years suggest portfolios with broad market exposure, like those managed by Members Trust Company, stand to benefit regardless of the political outcome.

Sources: Cook Political Report, 1/23/20241, US Bank, 12/20232, Congressional Budget Office, 6/18/20243, Northern Trust Asset Management, 1/20244 Non-deposit investment products available through Members Trust Company are not deposits of or guaranteed by the trust company, a credit union or credit union affiliate, are not insured or guaranteed by the NCUA, FDIC or any other governmental agency and are subject to investment risks including possible loss of the principal amount invested. Members Trust Company, owned and managed by America’s credit unions, is a special purpose federal thrift regulated by the Office of the Comptroller of the Currency. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Past performance is not indicative of future results. Any opinions expressed are those of the presenter and do not necessarily reflect the position of Members Trust Company. The information above is obtained or compiled from sources we believe to be reliable. We Do Not Guarantee that such information, will be free from errors, omissions, whether human or mechanical, nor do we guarantee their timeliness, accuracy, or completeness.