Election 2024: Market Impact Insights
It's that time again when we are staring down another heated election cycle. You may be like several of our friends and clients and have asked us the same question - what do you think the equity markets are going to do in this election cycle? If you find yourself thinking about this too often or more than you want to, hopefully this blog is the last time you must think about this before early November.
What do equity markets do during US election years?
Historically, the S&P 500 has posted slightly lower total returns in presidential election years. From the beginning of 1928 to the end of 2023 there have been 24 election years. During those years the average annual return of the S&P 500 was 11% with a median return of 14%. For all of the other 72 years the average annual return has been 11.6% with a median annual return of 14.7%. T. Rowe Price illustrates this data in the below graphic.
Who's better for the equity markets a Democrat or Republican?
It's hard to really tell. The markets and data do not really show a clear winner between Democrats and Republicans. Mean S&P 500 annual growth rate during republican terms since Dwight Eisenhower has been 6.2% but for Democrats it's been at 9.6%, favoring the Democrats. However, the median S&P 500 compounded annual growth rate over the same period has been 10.2% for the Republicans and 8.5% for the Democrats, favoring the Republicans. VisualCapital provides a good graphic illustrating this.
What does market volatility look like during an election period?
You may expect that volatility of the equity markets around presidential election years to be greater. However, over the past almost 100 years that really has not been the case. In fact, volatility tends to be mostly in line with non-presidential election years, except for the three months leading into November 7th. Historically, volatility is noticeably lower during that window. It's hard to determine exactly what volatility will be like for this election cycle, but it may not be as noticeably different from average market volatility.
Curiously, the data becomes a little bit more interesting if you look at the difference between the incumbent party winning the presidency and the incumbent party losing the presidency. In a scenario where the incumbent party loses, market volatility is noticeably higher than if the incumbent party were to win, historically. This data is illustrated by T. Rowe Price’s chart below.
How Should Investors Respond?
Great question! Historically, markets have rewarded long term investors under a variety of US presidents. This chart by DFA below shows historical returns hypothetical growth of a dollar invested in the S&P 500 since the beginning of 1926 into the end of 2023. As you can see, the growth of a dollar investment almost 100 years ago has been incredibly robust.
It is our opinion that portfolio design and allocation should be based on long term investment trends in data rather than short term market disruptions. However, your portfolio should be designed to contemplate your needs, your liquidity requirements, and your risk tolerance. If you feel like those may not be in line with your current portfolio allocation, it's probably time to have a conversation with us, and we'll be happy to discuss how a volatile market may impact your portfolio.
If your portfolio is in good place, let this be a reminder just to keep your eyes on the proper investment horizon. Tuning in to the sensational CNBC talking heads, where common news becomes big headlines, is entertaining, but it should not be informing your portfolio design significantly. For most of us, our portfolios will last us 10, 20, or even 50 years. The short-term highs and lows of the S&P 500 will be drowned out by decades of compounding.
