The performance of the stock market during presidential election years has long been a subject of interest for investors. Historically, there have been notable differences in stock market returns between election years and non-election years, and various factors contribute to these variations.
With the S&P 500 and NASDAQ hitting multiple record highs so far in 2024 – and a presidential election looming at the end of the year – now is an opportune moment to examine these trends and offer guidance on what investors should and should not do.
Historical trends
Election Year Volatility: Historically, election years are marked by increased volatility in the stock market (but in 2024, market volatility is close to all-time lows). Uncertainty surrounding potential changes in fiscal and monetary policies, trade relations, and regulatory frameworks can lead to market fluctuations. Investors often react to the anticipated impacts of a new administration’s policies on different sectors of the economy.
Incumbent Advantage: Data suggests that when the incumbent party wins the election, the stock market tends to perform better. This can be attributed to the continuity and predictability in policies, which investors generally favor. Conversely, when there is a change in administration, the initial reaction might be negative due to uncertainty.
Post-Election Rally: Regardless of which party wins, there is often a post-election rally. Once the election results are finalized, the uncertainty dissipates, leading to a sense of stability and optimism among investors. Historically, the stock market has experienced positive returns in the months following an election.
Non-Election Years: Non-election years typically exhibit more stable and predictable market performance. Without the added layer of political uncertainty, market movements are more influenced by economic fundamentals such as corporate earnings, interest rates, and global economic conditions.
Stock market returns since 1952
The S&P 500 has historically averaged a 7% gain during U.S. presidential election years since 1952, according to a study by LPL Financial. While a 7% gain is very respectable, it does fall short of the 16.8% average gain seen in the year preceding an election year (remember, the S&P 500 saw a 21.9% gain in 2023).
Looking ahead to the remainder of 2024, there is positive news for investors. Historically, the S&P 500 has not experienced a decline during a presidential re-election year since 1952. This trend suggests that re-election years can be particularly favorable for stock market performance.
Explanations for trends
Policy Uncertainty: Elections bring the potential for significant policy changes, which can impact various sectors differently. For instance, discussions around healthcare reform, tax policies, and environmental regulations can create uncertainty for businesses and investors.
Market Sentiment: Investor sentiment plays a crucial role in market performance. During election years, media coverage, political debates, and opinion polls can influence investor sentiment and lead to increased market volatility.
Economic Indicators: Economic indicators such as GDP growth, unemployment rates, and inflation also play a role. During election years, candidates often highlight economic performance as part of their campaigns, which can lead to increased scrutiny and reactions from investors.
Guidance for investors
Focus on Long-Term Goals: Investors should maintain a long-term perspective and avoid making impulsive decisions based on short-term political events. Historical data shows that the stock market tends to recover from election-induced volatility.