The Presidential Election and the Stock Market

Aug 20, 2024

Presidential elections stir up a lot of excitement and anxiety when it comes to the stock market. Many investors often wonder how the outcome of the election will affect their portfolios. This can lead to speculation and an increase in short-term trading. But how does short-term volatility and short-term return compare to the long-term? Here, we compile some interesting information and the effects of the election.

 

“Increased Volatility” or “Increased Volatility?”

There is little doubt that during an election year that there is a perception of increased volatility. This is to be expected as investors likely react to the uncertainty surrounding policy changes. However, given that presidential elections are in four-year increments, the data associated with the stock market is limited. But with the information that is available, we witness an unexpected result. As illustrated in the graph below, while the perception is that markets can be jittery in an election year, we see that it may not actually be the case. In seven scenarios out of the nine, T.Rowe. Price finds that the volatility is lower in presidential election years when compared to other years.

source: https://www.troweprice.com/content/dam/trp-ecl/global/en/ipc/assets/us-retail-intermediary/2024/april/how-do-us-elections-affect-stock-market-performance/how-do-us-elections-affect-stock-market-performance.pdf

Stock Market Gains or Losses

Policy decisions by the party in power are expected to shape the market, therefore the markets will go up or down based on those policies, right? Over the short-term this may be due to the market adjusting to new policies and the uncertainty surrounding the party’s ability to implement them. Interestingly, a study done by US Bank shows that the markets do move slightly leading up to and shortly after the election. These gains look to be temporary, and market conditions usually normalize once the new policies are defined.

source: https://www.usbank.com/investing/financial-perspectives/market-news/how-presidential-elections-affect-the-stock-market.html

In the long run, elections have little bearing on market performance. Instead, economic and inflationary factors are the primary drivers of returns. Looking at data compiled by TIAA, we see that the average annual return during the election years was 10.2%, while over the same period the S&P 500 produced an average annual return of 10.1%.

source: https://www.tiaa.org/public/pdf/t/tiaa-cio-perspectives-2024outlook.pdf

What Should You Do?

Data shows that perception that presidential elections significantly impact the market are just that, perceptions. Historical data demonstrates that their long-term impact is minimal. The broader strength of the economy and inflationary trends act as a greater influence on market performance. During election years, trying to guess what the market will do is not reliable. Instead, focusing on your long-term plan and resist the urge to trade based on the election. A well-balanced investment approach over the long term is ideal for market volatility to meet your long-term financial goals.

— More —

Irrevocable Life Insurance Trusts: An Estate Planning Tool

Irrevocable Life Insurance Trusts: An Estate Planning Tool

Irrevocable Life Insurance Trusts (ILITs) are powerful tools for estate planning. There are two key features that make up an ILIT: a Life Insurance Policy and an irrevocable trust. By combining these two elements you may gain more benefits than having life insurance...

The Mega Backdoor Roth – Tax Free Growth Tax Free Retirement

The Mega Backdoor Roth – Tax Free Growth Tax Free Retirement

The Roth IRA, allowing individuals to save after-tax dollars and then grow those investments completely tax-free with no requirement to take distributions, were a welcome addition to the retirement savings landscape in 1998.  However, many people are locked out of...

I Bonds – Time to Revisit That Investment?

I Bonds – Time to Revisit That Investment?

I Bonds where all the rage not too long ago. I Bonds are a type of U.S. savings bond that offer investment safety with a feature designed to protect against inflation. When inflation was heating up in 2021/2022, there came a point when the interest rate on an I Bond...

SEP IRA vs. Solo 401(k): Retirement Savings for the Self-Employed

SEP IRA vs. Solo 401(k): Retirement Savings for the Self-Employed

Being self-employed is never easy. Thinking about your retirement and associated retirement accounts is often an afterthought. But contributing to a retirement account is still critical. Two popular (non-exhaustive) options that self-employed people can use to access...

To S-Corp or Not to S-Corp

To S-Corp or Not to S-Corp

When starting a business, owners often face the dilemma of which corporate structure to use. For smaller businesses, particularly those with only a single owner, the first three options that come to mind are operating as a sole proprietor, a limited liability company...

Climate On The World Stage

Climate On The World Stage

In January, world economic leaders gather in Davos, Switzerland for a 5-day meeting convened by the not-for-profit World Economic Forum (“the Forum”) to discuss global risks and opportunities as well as forge connections for cooperation on issues that impact the...

Year-end Tax Strategies

Year-end Tax Strategies

Before your brain goes full holiday-mode, as the year draws to a close, it’s time to consider some savvy end-of-year tax strategies. While it’s always better to plan throughout the year, here are two such strategies: tax loss harvesting and tax bracket stacking, which...

Growing Interest in Sustainable Investing

Growing Interest in Sustainable Investing

With the rise of the conscientious consumer and growing awareness about global warming, it’s no wonder that companies are pivoting toward higher sustainability. Aiming to increase sales by distinguishing their products to consumers, companies are finding...

Book an Introductory Meeting Today

Start your ESG/SRI journey. Schedule a no-obligation, 15-minute complimentary call to learn more about our approach and how it may fit with your goals.

Top