Market Expectations for the Upcoming U.S. Elections: A Positive Outlook

As the 2024 U.S. presidential election approaches, investors are turning their attention to how this pivotal political event may impact financial markets. Historically, election years have brought a degree of uncertainty to the stock market, but there are compelling reasons for investors to remain optimistic.

The key to navigating this period lies in understanding historical trends, maintaining a long-term perspective, and recognizing the resilience of markets regardless of election outcomes.

Historical Election Trends and Market Performance

One of the most reassuring aspects for investors is that stock markets have shown remarkable resilience during U.S. election cycles. While elections can create short-term volatility, market performance over the long term is not typically tied to which party wins the presidency. As noted by The Week, “the S&P 500 has historically averaged positive returns under nearly every partisan combination.” This means that regardless of whether Democrats or Republicans take control, markets tend to trend upward in the long run. Investors may experience minor fluctuations in the lead-up to the election as uncertainty rises, but these dips have often proven to be buying opportunities.

The Presidential Election Cycle Theory, developed by Yale Hirsch, suggests that markets tend to perform better in the third and fourth years of a presidential term, as incumbent presidents focus on stimulating the economy and boosting market confidence to secure re-election or support their party’s successor. This theory has held up relatively well, with data showing that the S&P 500 typically experiences its largest gains in the third year of the cycle. A study from Charles Schwab researcher Lee Bohl indicated that between 1933 and 2015, the third year of the presidential term averaged returns of 13.5%, higher than any other year of the cycle, and whilst this performance pattern doesn’t guarantee future returns, the trend offers some comfort. Looking forward to the 2024 election, there is potential for another rally as election-driven economic policies take shape.

Short-Term Volatility with Long-Term Gains

It is important to acknowledge that while markets are generally positive in the long term, short-term fluctuations may occur due to heightened political discourse and changing economic priorities during election season. Investors often react swiftly to news about candidates’ policies on taxation, trade, and fiscal stimulus, which can result in momentary volatility. However, as Fidelity points out, “market moves are more likely to be driven by market and economic fundamentals, such as corporate earnings, interest rates, and other economic factors,” than by political news.

In this context, short-term volatility resulting from political uncertainty is unlikely to affect the stock market’s trajectory over the longer term. Investors who stay the course and avoid making impulsive decisions based on election headlines are likely to benefit from the market’s underlying strength.

Presidential Power and Market Impact

While the president wields significant influence, it is crucial to recognize that the U.S. stock market is affected by a myriad of factors beyond political leadership. According to Investopedia, presidential elections can shift national policies, but broader economic fundamentals, such as corporate earnings and global trade conditions, are often more powerful determinants of market behaviour. It’s also worth noting that presidential power is constrained by Congress, and the makeup of the Senate and House of Representatives plays a significant role in shaping policy outcomes.

Additionally, Kiplinger tells us that the overall effects of elections on the market are minimal in the long run. The S&P 500 has historically shown resilience, regardless of the electoral cycle. Vanguard research, dating back to 1860, found no statistical relationship between market performance and election years, underscoring the importance of staying invested even in times of political uncertainty.

**A Global Perspective: Europe: The presidential election is not only significant for domestic investors; it also has far-reaching implications for global markets, particularly in Europe. The transatlantic economic relationship is deeply intertwined, and changes in U.S. policy can reverberate across European financial markets. While there may be short-term volatility in European stocks as investors react to election news, the broader outlook remains positive. European markets typically respond well to a stable and predictable U.S. administration, especially in terms of trade agreements and foreign policy decisions that support global economic growth.

Furthermore, the European economy is recovering from recent macroeconomic challenges, such as inflation and energy shortages, and many analysts expect that a U.S. election outcome which supports global trade will have a stabilizing effect on European equities. Investors in Europe are likely to be cautiously optimistic, knowing that the U.S. remains a key trading partner and economically.

Emerging Markets and the U.S. Election

Emerging markets, often more sensitive to global economic conditions, will be closely watching the U.S. presidential election for signs of potential shifts in trade policies, interest rates, and the U.S. dollar’s strength. Historically, emerging markets have benefited from U.S. administrations that promote free trade and global economic cooperation. While some volatility in emerging market equities may arise as investors speculate on potential changes in U.S. foreign policy, there is a positive outlook overall.

Emerging markets could see significant investment inflows if the next U.S. administration adopts pro-growth policies that spur global economic expansion. Additionally, a stable U.S. dollar, supported by a strong U.S. economy, is likely to benefit emerging markets by easing the debt burdens of nations that rely on dollar-denominated borrowing. As such, the election outcome will be watched closely, but the potential for emerging market growth remains encouraging.

Conclusion: A Bright Future for Markets

Despite the uncertainty that presidential elections may bring, history shows that the U.S. stock market has consistently performed well over the long term, regardless of which party occupies the White House. Investors who maintain a diversified portfolio and a long-term perspective are well-positioned to navigate any election-related volatility and benefit from the market’s resilience. Moreover, the positive effects of the U.S. election could extend beyond its borders, offering potential growth opportunities for both European and emerging markets. As always, staying informed and sticking to sound investment principles will be key to weathering the election season successfully.

Sources: US Bank, T.Rowe Price, Investopedia, First Trust, The Week, Kliplinger, Fidelity