Elections may seem like a big deal in the moment, but historically have had little bearing on what path the economy and market ultimately take.
Sometimes you just need a reality check. The S&P 500 continued to trend higher last week, even clocking eight straight days of gains (a first since 2021) through Wednesday. It wasn’t all smooth sailing though, as investors had to contend with a firmer tone from Chair Powell on Thursday and Moody’s downgrade to its outlook on U.S. government credit over the weekend. That provided another reminder of why yields may be struggling to find a sustained path lower so far.
Yet the U.S. economy continues to move in a better direction, with growth and inflation cooling from their hot clip. But as central bankers have also signaled the fight isn’t yet over, the process of getting there is bound to be wrought with fits and starts, and some discomfort. We think that’s to be expected, and as the cloud of uncertainty clears, we see more potential in a world in transition.
Outside of the recent hot topics and slate of risks (the economy, central banks, geopolitics and the like), it was also a big week for U.S. politics. Voters hit the polls in Ohio, Kentucky, Virginia, Mississippi and elsewhere to decide on local offices and a number of key issues. The GOP hosted its latest debate. And this Friday, Congress will come up against its budget deadline to avoid a government shutdown.
Looking further ahead, next year will bring 40 national elections across the globe, representing more than 40% of the world’s population and 40% of its GDP. The election year will kick off with Taiwan in January, include the UK once called, and culminate with the U.S. in November.
So as last week marked one year until the U.S. election, today we offer three thoughts on what we’re watching in the year ahead.
(1) A year is a long time in politics
By November 5, 2024, U.S. voters will have cast their ballots to elect a president, all 435 representatives in the House, 34 of 100 senators, and 11 state governors. Between now and then, there will be a flurry of key events, with a quick ramp-up in the New Year. January 15 will kick off caucuses and primaries to help states choose their presidential nominees, and by March 12, the final nominees from each party should be clear.
Voters will also cast their ballots for key members of Congress
The chart shows two different donut charts representing the split between Republican and Democrat seats in the House of Representatives on the left and the Senate on the right. In the House of Representatives, the Republicans have 221 seats, Democrats have 213 seats, and one seat is vacant. In the Senate, 49 seats are Republican with 11 up for election in 2024, and 48 seats are Democrat with 20 up for election in 2024. Three seats up for election in 2024 are vacant.
Right now, it’s looking like another Biden versus Trump standoff—at least according to prediction markets, favorability polls and most political pundits. That said, a lot can change in just a week of politics, let alone a year.
Polling aside, we’d note that history is usually on the side of the incumbent when it comes to the actual election. Since 1912, incumbents (here, President Biden) have won roughly three times out of four—except when there’s been a recession within two years prior to an election day. As we know, the 2020 election fit that bill.
(2) When it comes to the economy and markets, the impact often comes down to policy
The U.S. economy has continued to grow regardless of who is in the White House
The chart shows U.S. National Gross Domestic Product in the United states as a line chart since 1930, with dots on the line representing U.S. presidential elections, the year they took place, and a picture of the winning candidate. In 1928, the GDP was $92.2 billion and the winning candidate was Herbert Hoover. In 1932, the GDP was $59.5 billion and the winning candidate was Franklin Roosevelt. In 1948, the GDP was $274.5 billion and the winning candidate was Harry Truman. In 1960, the GDP was $542.4 billion and the winning candidate was John F. Kennedy. In 1968, the GDP was $940.7 billion and the winning candidate was Richard Nixon. In 1976, the GDP was $1,873.4 billion and the winning candidate was Jimmy Carter. In 1980, the GDP was $2,857.3 billion and the winning candidate was Ronald Reagan. In 1988, the GDP was $5236.4 billion and the winning candidate was George H.W. Bush. In 1992, the GDP was $6,520.3 billion and the winning candidate was Bill Clinton. In 2000, the GDP was $10,251 billion and the winning candidate was George W. Bush. In 2008, the GDP was $14,769.9 billion and the winning candidate was Barack Obama. In 2016, the GDP was $18,804.9 billion and the winning candidate was Donald Trump. In 2020, the GDP was $21,323 billion and the winning candidate was Joe Biden.
That said, elections can impact the economy and markets more directly when candidates’ proposals:
- Clearly impact specific sectors or regions, such as the 2010 Patient Protection and Affordable Care Act that shook up the healthcare sector, or the combined impact of the 2021 Infrastructure Investment and Jobs Act (IIJA), the 2022 Inflation Reduction Act (IRA), and the 2022 CHIPS and Science Act (CHIPS), which has led to a large focus on real economy sectors and semiconductors.
- Change expectations for growth and inflation, such as trade agreements like NAFTA that drove further globalization, boosted growth and led to lower prices.
At this point in the race, it’s too early to outline those potential impacts, with little having been put forward in terms of policy proposals.
Finally, it’s also important to note that not all policy proposals go through. High-impact proposals seem more likely to be adopted only if one party controls the White House and Congress, and even then, policymakers are often confronted with challenges and bottlenecks.
(3) In the end, though, the underlying macro trends tend to matter most
For instance, in the last presidential election in 2020, it was the tides of lockdown and reopening from the COVID-19 pandemic that impacted broad markets most, rather than the differing ideologies between now-President Biden and then-President Trump. Or consider 2008 when Democrat Barack Obama ran against Republican John McCain: The unfolding Global Financial Crisis was the predominant driver, rather than opposing candidate views on the war in Iraq and healthcare policy.
Going back to 1980, stocks have rallied in the year following an election, on average. So while volatility may pick up with the unknown heading into an election day, stocks tend to forge ahead as uncertainty fades.
Stocks tend to be volatile heading into an election, and rally thereafter
This line chart shows the S&P 500 level around U.S. presidential elections going back to 1980, index to 100 as of the week of the election. This reflects performance from 18 months prior to the election date until 12 months after. The highlighted lines show the performance for the years 2008 and 2020, as well as the average performance. The 2008 line begins at 155 and remains around those levels until 10 months before the election. From there, the line breaks lower to 130 by the time we are three months before the election, and sharply moves lower from there to 100 on the election date. The indexed S&P 500 line moves lower again following the election to a series low of 71 by four months after the election, and then grinds higher to end at 107 by 12 months after. The 2020 line begins at 90 and gradually moves higher to 102 by eight months before the election. There is a sharp move lower to 70 by seven months before, then after it steadily moves higher to 100 by the time of the election, and 141 by the end of the series—the highest endpoint in all of the series. The average line starts at 97 and remains rangebound to slightly higher for much of the time in the lead-up to the election date. There is a slight decline from 103 to 100 in the month prior to the election before steadily increasing after the election date to end at 114 by the 12 months after.
In the end, stock prices represent the profitability of the underlying companies more than the current political party. Politics can invoke strong emotions, but one should not lose sight of their long-term investment goals.
So if the macro matters most, where is the economy today?
As we wrote the other week, we still see evidence for a soft landing in the U.S.: growth is strong but cooling, and inflation has made a lot of progress. There’s still a long list of risks, but the environment we see today leads us to focus on a few considerations, regardless of which way the 2024 U.S. election might swing.
- Step out of cash: Central banks look like they’re pretty much done hiking, and yields tend to fall pretty quickly when that happens. To us, this means cash carries reinvestment risk, and today’s elevated bond yields offer an opportunity to lock in higher income potential for longer. We see opportunity across maturities, currencies (USD, EUR and GBP), risk spectrums and issuer types.
- Rebuild equity portfolios: With bond yields likely in the process of peaking, investors may start to refocus on fundamentals. The Q3 earnings season is coming to a close, and in all, the S&P 500 stands to generate +4% year-over-year earnings growth for the quarter (versus expectations for a slight contraction heading into the season), and 12-month forward earnings expectations still look solid. Tech+ is seeing some of the strongest growth.
- Broaden your toolkit: As central bankers keep interest rates “higher for longer”, private credit could benefit. And while we believe central bankers will win their fight against inflation, it may still settle at a higher level versus the last cycle. Real assets can offer protection. Finally, experienced managers can capitalize on stress in commercial real estate.
Your J.P. Morgan team is here to help you navigate the shifting landscape and create a portfolio that is built to last, whether it be through business cycles or elections.
All market and economic data as of November 2023 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
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