Should an election year worry investors? Here’s why we don’t think so.
Madison Faller, Global Investment Strategist
Shawn Snyder, Global Investment Strategist,Executive Director
At long last, U.S. stocks reached a new all-time high last week. Amid a flurry of data, central bank rhetoric and the start to earnings season, it’s already a busy start to the year.
As if that wasn’t enough, 2024 is also the year of elections.
Over 40% of the world’s population and economy will hit the polls to elect national leaders, which started with Taiwan last week, with the UK election likely later in the year once called, and culminating with the U.S. in November. Last week’s Iowa caucus already kicked off U.S. primary season, and New Hampshire follows this week. Election debates will only ramp up from here.
Many are watching the U.S. election in particular. 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, 10 months is a long time in politics. Much could change, and the lead-up to Election Day can stir up emotions and apprehension about the future.
Today, we debunk three common U.S. election myths when it comes to markets.
Myth 1: Stocks don’t do well in election years
Reality: Returns in election and non-election years usually aren’t all that different.
We took a look at how the S&P 500 has fared in both instances. Going back to 1928 (for as long as we have data), stocks returned 7.5% on average during election years, compared with 8.0% during non-election years. Slightly weaker but still solid.
The chart shows the S&P 500 average annual price returns from 1926-2023 in election years versus non-election years.
In an election year the average return is 7.5% while the non-election year average is 8.0%.
That said, election years do tend to be more volatile than most, especially in the lead-up to voting day. For instance, the average election year since 1980 has seen an intra-year drawdown of about 17% versus 13% in non-election years. Volatility is a feature, not a bug, of investing in any year, but it tends to be more pronounced as households grapple with more uncertainty.
Yet as that uncertainty dissipates as results are announced, stocks tend to rally on a sense of clarity about the path forward.
Myth 2: Markets will crash if so and so candidate wins
Reality: We’ve seen booms and busts on both sides of the aisle. The economic backdrop tends to matter more.
While stocks tend to rally in elections’ aftermaths, it’s true that some election years have seen bigger swings than others. But those instances have tended to do more with the underlying macroeconomic backdrop than the election itself.
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.
With that, and the last 40 years of elections in hand, stocks have still been higher a year later on average.
This chart shows the S&P 500 performance around U.S. elections since 1980, Indexed to Election Day.
At 18 months prior to election day the price index in 1984 was 99, in 1992 was 91, in 1996 was 74, in 2004 was 82, in 2012 was 80 and the average of the price index across all elections since 1984 at 18 months prior was 97.
At 6 months prior to election day the price index in 1984 was 95, in 1992 was 99, in 1996 was 91, in 2004 was 98, in 2012 was 93 and the average of the price index across all elections since 1984 at 6 months prior was 100.
At 3 months prior to election day the price index in 1984 was 97, in 1992 was 101, in 1996 was 94,in was 2004 97, in 2012 was 95 and the average of the price index across all elections since 1984 at 3 months prior was 102.
At 6 months after election day the price index in 1984 was 108, in 1992 was 105, in 1996 was 116, in 2004 was 102, in 2012 was 104 and the average of the price index across all elections since 1984 at 6 months after was 106.
At 12 months after election day the price index in 1984 was 114, in 1992 was 112, in 1996 was 130, in 2004 was 106, in 2012 was 103 and the average of the price index across all elections since 1984 at 12 months prior was 113.
Myth 3: The Federal Reserve doesn’t change policy in election years
Reality: The Fed hasn’t shied away from hiking or cutting rates during election years.
Going back to the 1950s, 2012 has been the only election year the Fed did not either raise or lower interest rates. Similar to Myth #2, this suggests the economy, rather than politics, is in the driver’s seat when it comes to monetary policy. We believe this year will be no different.
This chart shows the change in Fed Funds rate during election years
As of December 2020, the one year change to the closest 12.5bps in the Fed funds rate was -1.5%.
As of December 2016, the one year change to the closest 12.5bps in the Fed funds rate was 0.25%.
As of December 2012, the one year change to the closest 12.5bps in the Fed funds rate was 0%.
As of December 2008, the one year change to the closest 12.5bps in the Fed funds rate was -4%.
As of December 2004, the one year change to the closest 12.5bps in the Fed funds rate was 1.25%.
As of December 2000, the one year change to the closest 12.5bps in the Fed funds rate was 1%.
As of December 1996, the one year change to the closest 12.5bps in the Fed funds rate was -0.25%.
As of December 1992, the one year change to the closest 12.5bps in the Fed funds rate was -1%.
As of December 1988, the one year change to the closest 12.5bps in the Fed funds rate was 1.88%.
As of December 1984, the one year change to the closest 12.5bps in the Fed funds rate was -1.25%.
As of December 1980, the one year change to the closest 12.5bps in the Fed funds rate was 4%.
As of December 1976, the one year change to the closest 12.5bps in the Fed funds rate was 1%.
As of December 1972, the one year change to the closest 12.5bps in the Fed funds rate was 2%.
As of December 1968, the one year change to the closest 12.5bps in the Fed funds rate was 1.5%.
As of December 1964, the one year change to the closest 12.5bps in the Fed funds rate was 0.5%.
As of December 1960, the one year change to the closest 12.5bps in the Fed funds rate was -2.5%.
As of December 1956, the one year change to the closest 12.5bps in the Fed funds rate was 0.5%.
The Fed’s big focus today is how to softly land the economy, and it’s no small task. The pivot toward rate cuts requires careful navigation, ensuring inflation makes the last mile of progress and that growth doesn’t tip into recession.
That said, once the election results are in, the new administration’s policy proposals could shift expectations for growth, inflation and even earnings. Some could also impact individual sectors that are most closely linked. But at this point in the race, it’s still too early to outline those potential impacts, and 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.
As the election chatter builds, we expect some of the hot button issues to include government spending and the deficit, tax policy, regulation, trade and geopolitics.
How can you plan for the year ahead?
While politics can evoke strong emotions, we don’t think you should lose sight of your long-term investment goals. We believe the economy will remain the predominant driver of policy decisions and markets broadly.
Of course, there are risks, from ongoing friction points such as inflation to wildcards such as geopolitics. But we believe that as growth holds up, price pressures abate and the Fed embarks on an easing path, there is ample opportunity for multi-asset investors in the year ahead.
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 January 2024 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.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
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