Historically, US elections have often caused short-term market volatility as investors react to uncertainty throughout the period and potential impending policy changes.
The 2024 US Presidential Election has already taken some unexpected turns. After a failed attempt on the life of former President Donald Trump, he secured the Republican nomination. Shortly after, President Biden withdrew from the race amid growing doubts about his age and ability to run again. He then endorsed Vice President Kamala Harris, cementing her as the Democratic Party’s candidate.
As this election season unfolds, these events have left investors wondering how the market might respond this time around.
Do Presidential Elections Influence Markets?
Elections can lead to significant shifts in policies such as tax rates and trade regulations, directly impacting the stock market. For example, Trump’s tax cuts initially boosted the market due to optimism, but his trade policies with China later created uncertainty, causing volatility. Similarly, under Biden, the S&P 500 struggled with interest rate hikes but rebounded when those hikes began to slow.
While the Federal Reserve is an independent body that focuses on economic growth, low inflation, and low unemployment, the Chair is typically nominated by the sitting president. This indicates some presidential impact on future monetary policy.
What Really Matters: Policy Changes and Investor Sentiment
However, research on investor behavior during election years consistently shows that markets are more influenced by various factors such as economic indicators, corporate earnings, geopolitical events, and monetary policies. Based on historical data, the year prior to a US presidential election has reflected the most variability in market performance compared to other times of the election cycle; however, the average returns of this period do not stand out as particularly high nor low.
Investor sentiment is often influenced by expected policy changes, which could come as a result of which president is in office, but broader economic factors tend to have a greater and more lasting impact. Markets are also nonpartisan, meaning that the winning presidential party (Democratic or Republican) has historically had no impact on market returns.
Overall, stock markets tend to be more influenced by future expectations rather than short-term political events, and so basing investment decisions on any one political event can be highly risky and counter-productive.
What should you do next?
The 2024 election period may bring uncertainty and market volatility, but the best approach is to stay focused on your long-term investment strategy rather than trying to predict what happens. Avoid getting caught up in daily news and short-term market fluctuations, as it can hurt your financial goals in the long run. Instead, keep your investments diversified, avoid impulse reactions, and stick to your plan, regardless of the outcome of any political events.
