Insights on Market Impact of Presidential Elections
With the U.S. set to choose its next President in less than three weeks, we want to share our view on portfolio positioning as we look ahead. Our general philosophy is that portfolio and investment decisions should be guided by an analysis of longer-term risks and rewards, as opposed to anticipating election outcomes, and this has served us well in previous election cycles. With that said, we recognize that it’s natural for investors on both sides of the aisle—especially in today’s polarized environment—to believe that an election outcome could have a big and potentially immediate impact on the financial markets. This intuition, however, is not supported by the historical data and we provide some evidence to this point in our comments below. Overall, it’s important to remember that U.S. stocks have historically trended higher regardless of the political party of the President, as shown in this first chart.
Source: Bloomberg. Data as of 9/30/2024.
Ultimately, over the longer term (which is the basis for our investment decisions) the market is driven by economic fundamentals, such as the fed funds rates, corporate earnings, valuations, fiscal imbalances, interest rates, inflation expectations, among other factors. Undoubtedly, headlines will influence short-term market fluctuations, but longer-term fundamentals are what drive market performance. We do not minimize the importance of the election and potential policy differences in our evaluation process, but we also recognize that the gears of the economy are not overhauled based on an election outcome. For example, the U.S. economy is primarily consumer driven, and that’s not going to change. We also maintain the view that the fundamentals of the economy don’t change overnight, and for that reason we don’t think our investment strategy should either.
Market Performance Around Elections – A Review of Historical Data
As for market performance around elections, there have been elections that resulted in stock market volatility and declines, notably when incumbents lose. While technically there is no incumbent in this election, markets also typically see a strong rebound in the year following any post-election declines. As the chart below shows, historically elections have not had a meaningful or long-lasting effect on stock market performance. That makes us believe it is wise to remain focused on the longer-term drivers of markets and even be prepared to take advantage of any pricing opportunities created by post-election market declines.
We have found that the lack of consistency in the impact of past elections on investment results runs deeper than just the overall stock market level. Analysis by Richard Bernstein Advisors goes deeper and demonstrates the variability of returns at both the asset class and industry sector levels under past administrations (see tables below).
Source: Richard Bernstein Advisors, LLC. Presidential terms measured by inauguration dates. Monthly performance for month-end following inauguration date to month end following next inauguration until 3/31/1992 when daily becomes available for all asset classes at which point actual inauguration dates used. Biden returns are calculated through 8/31/2024.
Source: Richard Bernstein Advisors, LLC. Presidential terms measured by inauguration dates. Biden returns are calculated through 8/31/2024
It’s important to note that the election and post-election year results shown in these tables reflect the average result historically, and the sample size is relatively small. We also recognize that there are many reasons the market could respond differently in any given election. But the broad message from historical data is that instead of betting on election results we are better off remaining true to our longer-term investment discipline, in which we consider multiple macro scenarios, and assess the potential risks and returns for numerous asset classes and investments in each scenario. In our strategy we are focused on fundamentals and an investment approach built on the confidence that over time securities prices will reflect these fundamentals.
Meanwhile, Presidential election or not, in the shorter term we are prepared to guide our clients through the inevitable periods of market volatility and shorter-term downside risk that can occur. This is where the discussions we have with our clients to gain a deep understanding of their risk tolerance are reinforced in how we manage a portfolio to suit each clients’ varying level of comfort with volatility and shorter-term downside. Regardless of where an investor falls on the risk tolerance spectrum, it is critical to remember that volatility and temporary declines in value are a normal part of owning stocks and other higher-expected-return “risk assets.” We expect partisanship and news flow to be in overdrive in these final days, so we know there will be many distractions. Our job, however, is to maintain an objective focus on the longer-term analysis of our investment environment and take advantage of any investment opportunities we believe are presented to us.
Important Disclosure
This report is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions expressed herein represent the current views of the author(s) at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such.
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