Election Anxiety? Could Bonds Calm Your Fears?

Lawrence Gillum | Chief Fixed Income Strategist

Last Updated:

With election season in full swing, investors may be concerned about how either a second Joe Biden or a second Donald Trump presidential term would impact their portfolios. However, as we said in Midyear Outlook 2024: Still Waiting for the Turn, for the long-term investor, political opinions are best expressed at the polls and not in portfolios. Investors, we noted, are better served by staying invested in markets regardless of which party claims the presidential office. That doesn’t mean there won’t be volatility; there likely will be, especially as the rhetoric increases going into Election Day. Historically, that increased rhetoric has translated into increased policy uncertainty.  

A recent research report from Guggenheim Investments examined the performance of various markets under varying economic policy uncertainty regimes. Per their work, since 1985, during U.S. presidential election years, the U.S. Economic Policy Uncertainty Index, which measures uncertainty related to economic policy based on media coverage, has averaged 17% higher relative to non-election periods. And the degree to which policy uncertainty prevails has had a meaningful impact on asset returns. The higher the economic policy uncertainty, the better high-quality assets have performed. And as parties finalize their presidential nominees, we could be about to enter that period.  

High-Quality Bonds Have Outperformed When Policy Uncertainty is High

Economic Policy Uncertainty and Asset Returns (Since 1985)

Bar graph of performance of different asset classes under different levels of policy uncertainty since 1985 as described in the preceding paragraph.

Source: LPL Research, Guggenheim Investments 07/18/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Of course, past performance is no guarantee of future returns. So, what could cause past performance from repeating this time around? I think it’s safe to say that neither party can claim fiscal responsibility at this point. So, with budget deficits expected to stay elevated over the next decade (per the Congressional Budget Office), Treasury security issuance will need to stay elevated to fill those deficits. Increased issuance could lead to the need for rates to stay elevated to attract demand. That said, economic conditions and the Federal Reserve’s (Fed) rate-cutting plans are more important to the overall trajectory of interest rates. And with the Fed expected to cut rates later this year, and with the potential for economic policy uncertainty to increase, we could have (marginally) lower rates throughout the rest of the year. As such, investors should consider increasing allocations to strategies invested in higher-quality fixed income particularly those investors with excess cash.

Lawrence Gillum profile photo

Lawrence Gillum

Lawrence Gillum, CFA, guides the fixed income view for LPL Financial Research and has over 20 years of investing experience.