U.S. Election: Do Markets Care Who Wins the Election?

Distinguishing Fact from Opinion

The 2024 U.S. presidential election will take center stage over the coming months as Americans prepare to cast their ballots. Polls currently point to a tight race, with forecasters increasingly focused on six key swing states (Arizona, Georgia, Michigan, Nevada, Pennsylvania, and Wisconsin) that could determine the winner. However, each candidate’s position on key policies such as federal debt and government spending, foreign policy and trade, healthcare, immigration, and taxes will ultimately drive the vote — all major issues both sides remain divided on.

While politics remain divided, one thing we can all agree on is that markets dislike uncertainty. And given the backdrop of political uncertainty in Washington, investors should expect increased volatility in the back half of the year. For example, during election years between July and November since 1950, the S&P 500 has exhibited an average annualized volatility of nearly 25%. Volatility, in this context, refers to the dispersion of returns over a given period. This compares to historical annualized volatility of around 20% during non-election years. In addition, since 1950, the average maximum drawdown for the S&P 500 during election years is -21.2%, compared to only -13% during non-election years. Bottom line, buckle up for a potentially bumpier ride into November.

Of course, the big question on Americans' minds is who will win. Polls, betting odds, and forecasts can provide valuable insights into potential results, but the data can be noisy. One of the more surprising and unbiased election forecasters has been the stock market. Since 1928, whenever the S&P 500 was positive during the three months leading up to an election, the incumbent party remained in control of the White House 80% of the time (12 of 15 elections). In contrast, when the market was lower during the three months before an election, the incumbent party lost the election eight of the last nine times. When combined, market performance has “predicted” 20 of the last 24 elections.

The keys to 1600 Pennsylvania Avenue are also not the only things up for grabs this November, as 34 seats in the Senate are up for election, along with all 435 seats in the House. This raises another popular question during election years: How do stocks perform under various leadership compositions in Washington? Like most elections, several scenarios could play out regarding future political configurations between the White House and Capitol Hill. And while we won’t know what Congress will look like until at least November, we do know that the S&P 500 has generated its best annual returns with a Democratic president and a Republican-controlled Congress. However, the market has also posted strong annual returns with either a Democratic or Republican president when Congress is divided [Fig 11].

Source: LPL Research, Bloomberg 06/24/24

All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

What happens in Washington can play an important role in our daily lives and help shape the economy, but politics alone do not drive markets or the economy. There are other more powerful macro forces catalyzing economic expansions and contractions, such as the health of corporate America and the consumer, not to mention monetary policy. For the long-term investor, political opinions are best expressed at the polls and not in portfolios. As highlighted below, if you invested $100,000 in the S&P 500 back in 1950, but only remained invested during years when a Democrat was president, you would have around $3.1 million today (excluding dividends), compared to $1.0 million if you only invested when a Republican was president [Fig 12]. While this gap appears wide, it lacks in comparison to the $32.6 million you would have made if you bought and held the S&P

500 over the entire time frame, giving credence to the adage of time in the market beats timing the market.

Source: LPL Research, Bloomberg 06/24/24

Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

The Bottom Line

The 2024 election is shaping up to be extremely close, with polls showing a virtual tie and key swing states likely to determine the outcome on election night. As the candidates have starkly different positions on many major issues, it is likely to be another divisive and contentious affair. Given the historical patterns and the fact that markets usually dislike extreme uncertainty, investors should be prepared for higher levels of market volatility in the back half of the year.