It’s 2024, and another election cycle is in full swing. Elections can make investors nervous – but should they? The economy, as usual, is a major part of election discussions, as jobs, taxes, and even the balances of investors’ 401k investments are brought into debates. Currently, economists note that in the final two months of 2023, a 60/40 portfolio of equities and bonds delivered its third-best two-month return in at least three decades1. The trigger? A further decline in US inflation and a “dovish pivot” from Federal Reserve Chair Jerome Powell. The result? US equities sit close to their all-time highs and 10-year US Treasuries trade with yields almost 100 basis points below their October peaks. While some volatility has occurred during January, with markets pricing in and/or out the pace of Fed rate cuts this year, US stocks seem to be forging ahead with moves upwards, coinciding with our UBS base case of an economic soft landing, where growth slows but remains healthy and inflation continues to trend lower.
However, leading up to national elections, many investors worry things will be “much different” economically if their preferred candidate doesn’t get elected, and they believe that could wreak havoc on the capital markets and one’s investments. Should people be nervous about their investment accounts during presidential election years, especially this one? And if we are sitting at all-time highs, does that mean it’s time to hit the panic button and get out of the markets?
If history is any guide, UBS analysis2 shows that extreme anxiety is not typically warranted. Over the past 60 years, in the one-, two-, and three-year periods following a new all-time high, S&P 500 returns have averaged 12%, 23%, and 39%, respectively. This is hardly different from the 12%, 25%, and 38% average returns for all other periods over the same time frames.
Also, historically, in election years, once nominees are identified, markets tend to regulate. Then, in the 12 months following the primaries, they often bounce back. In fact, according to a recent report from Capital Group, since 1932, stocks have gained an average of 11.3% in the 12 months following the conclusion of the primaries (using May 31 as a proxy) compared to just 5.8% in similar periods of non-election years.
With few exceptions, national polls should be treated with skepticism in how they could impact the stock market. Don’t put too much emphasis on political parties when it comes to companies’ stock prices because they depend primarily on the company numbers, such as its cash flow, asset returns and profit and loss history. The markets tend to prioritize company fundamentals over politics, politicians, or political parties when it comes to stocks.
During election cycles those running for election or reelection try to craft a positive spin on their policies and how they would affect the economy, whether or not those policies will actually be implemented. Then, once the voting results are final – there’s usually a sense of optimism, which can make its way through the equity markets, among those anticipating constructive economic change because of the newly elected candidate – or – those happy that the status quo has remained and the incumbent politician getting another term is a good thing. Due to the democratic-election process and fairly even split of the major parties, at least half of voters are left feeling the country is headed in the right direction; this optimism can flow through to many places within the economy, including the stock market.
That is why the markets traditionally do well leading up to and shortly after elections. Policy, however, takes months to draft, then is scrutinized by the Congress, the Courts, and the Fed. Our founding fathers had the foresight to create a system of checks and balances to keep policy fairly level and prevent tyrants from pushing through unchallenged agendas. Remember, about half the people who voted are optimistic that the economy will be in positive territory, despite the bias they may feel against the opposing party. Cooler heads tend to prevail.
Investors who share an affiliation with the political party in office are more likely to believe financial assets are undervalued and respond by increasing their allocation to equities. Conversely, investors disappointed with the outcome of an election often adopt a risk-off strategy and take refuge in fixed income securities. In Behavioral Economics, this phenomenon is known as “confirmation bias.” Either impulse may have pluses and minuses, which is why we suggest keeping a long-term view, with one’s own goals and risk tolerances in mind, rather than reacting to changes in the political landscape.
As for the current high levels of the markets, the strength of the American economy and of our democracy has typically kept things progressing, no matter which administration is in office. Growth may shift sectors a bit; some sectors do better during Republican administrations, others do better during Democratic ones.
Ultimately, a free-market society thrives on corporate earnings and fundamentals. Don’t let the acrimonious aspects of election ads or your own personal biases lead you to an emotional response to the stock market. Worry is not productive and doesn’t change anything. Just vote your conscience because that’s all you can do – and then work with your financial advisor to develop an individual plan that works for you and your family’s long-term goals and needs. Be confident that, while some fiscal and regulatory policies can affect the performance of individual investment or asset classes in the short run, longer-term portfolio construction is best treated as an apolitical exercise.
1 Mark Haefele, Global Chief Investment Officer Wealth Management, Global Letter, Feb. 2024
2 Solita Marcelli, UBS Chief Investment Office, GWM Americas, Investment Research, 22 January 2024
Jim Bruner is a financial advisor with UBS Financial Services Inc., a subsidiary of UBS Group AG. Member FINRA/SIPC in the Indian Wells, California office and a member of Aligned Wealth Partners. Jim holds accreditations as a Certified Financial Planner, Certified Exit Planning Advisor, Certified Private Wealth Advisor and Master Planner Advanced Studies.
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