How Election Outcomes Affect the Market: The Sky Isn’t Falling

As the 2024 election season unfolds, all eyes are on the political landscape in the United States, where electoral outcomes can significantly influence economic policies and sway investor sentiment. However, history illustrates that the relationship between election results and market performance is a complex tapestry, interwoven with unpredictable variables. While investors may feel compelled to adjust their portfolios in response to the latest electoral developments, data suggests that such short-term reactions often yield suboptimal outcomes.

The Historical Context of Election and Market Performance

One of the first questions investors ask during an election year is, “How will the market respond?” Historically, U.S. markets have tended to rise during election years. While this might seem reassuring, it is important to recognize that these gains reflect the market's general long-term upward trend rather than being specifically driven by election events. In other words, the market’s natural growth over time makes it difficult to isolate elections as a singular market-moving factor.

Election Cycles and Market Volatility

One reason investors might feel anxious during election cycles is the increased news coverage and political rhetoric. Headlines often predict massive market swings depending on which party is expected to win. However, research consistently shows that markets are relatively unaffected by election outcomes in the long term. While we have seen increased volatility around election day, the months in which elections take place are not noticeably more volatile than any other period.

Part of this can be attributed to the efficiency of financial markets. Stock prices generally reflect the expectations of millions of investors, including assumptions about the political landscape. These expectations are already “baked into” market prices, making it difficult for election outcomes to trigger major surprises. Elections are just one factor among many, and they are rarely the dominant driver of market performance.

The Myth of the Politically-Driven Market

A persistent myth among investors is that one political party is better for the markets than the other. While it is easy to find arguments supporting either side, the data does not substantiate a strong correlation between party control and market returns. Whether the Democrats or Republicans hold the presidency, the market has historically averaged positive returns under nearly every combination of party leadership.

Historically, the S&P 500 has shown positive returns under almost every type of political leadership. Interestingly, there is evidence to suggest that a divided government has often coincided with stronger market performance. This may be because political gridlock tends to reduce policy changes and create a more predictable environment for investors.

The markets are fundamentally nonpartisan. Companies operate in a wide array of economic environments, and their ability to innovate, adapt, and serve their customers is more critical to their long-term success than any single administration’s policies. This nonpartisan nature of markets further underscores why making investment decisions based on political outcomes is a risky and often ineffective strategy.

Sector Performance and Policy Impact

It’s tempting to assume that certain sectors will benefit or suffer based on the policies of the next administration. For example, a Democratic win might be seen as favorable to sectors like renewable energy, while a Republican win might be expected to benefit traditional energy companies. However, sector performance in election years is notoriously difficult to predict. Historical data shows little consistency in how different sectors perform during election years, further reinforcing the argument that making investment decisions based on anticipated policy changes is speculative.

One reason for this is that campaign promises often do not translate directly into policy. There are many stages between an election promise and an implemented policy, and the legislative process can dilute or alter proposals significantly. Betting on sector performance based on election outcomes, therefore, can be a hazardous approach.

Focus on Fundamentals

For investors, the takeaway from election cycles is clear: focus on economic fundamentals, not political outcomes. Corporate earnings, interest rates, and macroeconomic factors such as employment and GDP growth are far more reliable predictors of long-term market performance than the identity of the sitting president.

Rather than attempting to time the market around election events, investors are better served by sticking to a consistent, long-term investment strategy. This means maintaining a diversified portfolio that aligns with individual risk tolerance and financial goals. Emotional reactions to election results or political rhetoric can lead to costly mistakes.

Conclusion: Long-Term Stability in a Politically Charged World

While elections are undoubtedly important events with wide-reaching implications, their direct impact on financial markets is often overstated. Over the long term, markets have shown resilience and an upward trajectory regardless of which party holds power. Attempting to predict or time market movements based on election outcomes is a high-risk endeavor that often fails to deliver reliable returns.

Investors should focus on fundamentals and stick to a well-thought-out financial plan rather than being swayed by political cycles. By doing so, they can navigate the uncertainties of election seasons without sacrificing their long-term financial objectives. As history has shown, disciplined, long-term investing is the best strategy for weathering political and market changes.