Darren Berry
Private Client Director
On 5 November, Americans will go to the polls to elect their next president.
Until 21 July it seemed that the contest would be between the same two candidates as in 2020: Joe Biden, the Democratic incumbent, and Donald Trump, his Republican predecessor in office.
However, after a disastrous performance in a TV debate, Biden eventually bowed to pressure and withdrew from the race, endorsing his vice-president, Kamala Harris, as the Democratic candidate.
Since late July, Harris has overturned Trump’s lead in the polls, notably in several key swing states – as the graphic below shows.
With weeks to go before polling day, you might assume that election-year uncertainty could substantially impact market sentiment and performance. But does the presidential election materially affect markets? Read on to find out.
US equities achieve strong average returns in election years
Firstly, it’s interesting to note that stock market performance in the year of a presidential election is generally positive. Fidelity reports that, since 1950, US stocks have averaged returns of 9.1% in election years.
Source: Fidelity. Past performance is no guarantee of future results.
Of course, it’s important to consider that US equities have historically risen over the long term, so it’s not surprising to see an upward trend in the data.
In 2024, the main US indices have seen strong growth (figures between 1 January and 16 August 2024):
- S&P 500 – up 16.88%
- Nasdaq – up 19.16%
- Dow Jones Industrial Average – up 7.55%
Denise Chisholm, director of quantitative market strategy at Fidelity, says that the presidential election is not a notable “market-moving event”.
She adds: “Looking at the historical data, it appears that while the 12 months preceding a presidential election have had the widest range of possible market outcomes relative to other parts of the election cycle, the average return isn’t substantially better or worse.”
There is no more volatility in election years
You might also reasonably assume that markets would be more volatile and uncertain in the run-up to a presidential election.
However, research from T Rowe Price suggests that this is not generally the case.
Almost a century of history shows that elections don’t materially affect the volatility of the S&P 500 – an index of 500 of the largest US firms.
The research did find that volatility before the election and subsequent months tended to be higher in years when the incumbent party failed to remain in the White House, perhaps reflecting the uncertainty created by likely policy changes.
Two other trends stand out:
- When the incumbent party retained the presidency, volatility declined, on average, before the election and ticked up modestly afterwards.
- In presidential elections where the incumbent party lost, volatility increased significantly in the periods before the vote and then receded afterwards.
With Kamala Harris ahead in the polls, history would suggest a modest increase in volatility after the 5 November vote.
Markets are nonpartisan
Although presidential hopefuls might suggest that one party or the other is “better” for market returns, the historical data does not bear out these theories.
Anu Gaggar, vice president of capital markets strategy at Fidelity, says: “Markets are nonpartisan, so it’s very important not to base your investment strategy on the outcome of elections.”
The S&P 500 has historically averaged positive returns under nearly every partisan combination, as the chart below shows.
Source: Fidelity. Past performance is no guarantee of future results. Data excludes 2001 to 2002 due to Senator Jeffords changing parties in 2001.
Historically, there has not been a strong relationship between election outcomes and how markets perform from that point.
You should focus on the long term and stick with your plans
The 2024 election has already thrown up many surprising news headlines – not least the withdrawal of the incumbent president as a candidate and the attempted assassination attempt of his Republican challenger.
It can be tempting to invest according to your own viewpoint and whether you feel optimistic or pessimistic about the outcome of November’s election.
Historically, however, both presidential and midterm elections have failed to significantly bother financial markets. Consequently, adapting your strategy and trying to judge the markets accordingly could damage your progress towards your long-term goals.
Market moves are more likely to be driven by market and economic fundamentals, such as corporate earnings, interest rates, and other economic factors.
Naveen Malwal, institutional portfolio manager with Strategic Advisers, LLC, says: “While political headlines may at times cause short-term ripples in the market, long-term, for stocks, bonds, and other investments, returns seem to be driven much more by the fundamentals of the underlying asset classes”.
It’s a mantra we repeat to clients – it’s time in the market, not timing the market that counts.
Rather than trying to predict an election outcome and the effect it might have on asset classes, you are generally better served by creating a long-term financial plan that’s aligned with your goals and aspirations – and sticking to it.
Or, as Jurrien Timmer, Fidelity’s director of global macro, concludes: “Elections tend to have less impact on the markets than politicians may like to believe.”
To book your financial review, contact us online or call 020 7400 4700.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
