On Tuesday, November 5th, 2024, the U.S presidential election will take place and investors are anticipating how political changes can affect their own portfolios. The election can bring about volatility, but also great opportunities. While we previously had a matchup of Democratic Party’s Joe Biden vs. Republican Party’s Donald Trump, Biden recently chose to drop out and endorse Vice President, Kamala Harris. Since then, Kamala Harris has chosen Tim Walz as her Vice President, and Donald Trump has chosen J.D. Vance. Due to many factors, the stock market has currently been going through a period of volatility, largely related to the jobs market report, anxiety towards economic resilience, as well as anticipation of interest rate cuts. (U.S Bank 1). However, the election could play a positive or negative role in the market. The main question is, how can we navigate this period while also making profit and worthwhile returns?
Historical Market Trends During Election Seasons
The 2016 Election resulted in the S&P 500 moving marginally to the upside, and continued on a bull run up to 2020. For the 2020 Election, over the month of November, the S&P 500 had gone up 9.1%. The average return of the S&P 500 from the election in 1928 to 2016 was 11.28%, which is still within the normal range (Forbes 1). However, the average return for non-election years is higher at 11.6%. Additionally, the best presidential election year for the stock market was 1928 at 43.6%, and the worst year was 2008 at -37% associated with the financial crisis of 2008 (Bank Rate 1). The S&P 500 returns were also generally higher in the lead up to a presidential election versus a non-election year. In presidential election years, the stock market usually experiences the most fluctuations in the month before and the three months leading up to Election Day. Aside from the 12 months before and the month immediately following the election, the S&P 500 tends to be less volatile during most of the election year compared to non-election years (T.Rowe Price 1). Typically, there is more volatility leading up to the election, and slightly after the election. Also, market performance can vary depending on the election outcome or expectation of outcome, with different trends observed based on which party is likely to win or wins the presidency. However, the average return of the S&P 500, whether higher or lower, based on which party wins can largely fluctuate and there could be better returns with a Republican candidate one year or Democratic candidate another year, therefore there is no concrete answer.
Sector Specific Volatility
The healthcare sector can sometimes be sensitive towards election outcomes, with discussions around healthcare reform, drug pricing, and insurance regulations. The energy sector typically faces very high volatility due to the shifts in environmental policy. Financials can also be highly volatile, and impacted by expected changes in banking regulations, interest rates, and fiscal policies. Proposals related to taxation, corporate governance, and financial sector oversight can lead to anxiety regarding the market. For the technology sector, movement is typically stable, however, concerns over regulation can cause tech stocks to move based on how each candidate’s platform can affect big tech companies. The Defense and Aerospace sector may see stock price movements based on expectations around defense spending, military contracts, and foreign policy, all of which can be influenced by the likely election outcome. The Consumer Discretionary sector is typically less affected but can be affected by changes in consumer confidence tied to election outcomes, as well as potential shifts in trade policies, taxation, and wage regulations that influence consumer spending. Real Estate can experience volatility based on expectations of changes in interest rates, tax policies, and regulations affecting property markets, housing affordability, and construction.
Most Important Issues Regarding the Election
The 2017 tax cuts are set to expire in 2025. If not renewed, taxes will increase for many people and businesses. Trump wants to extend these cuts but hasn’t detailed how to handle the resulting budget deficit. Biden, during his campaign, supported keeping the cuts for those earning under $400,000 but letting them expire for higher earners and businesses. In addition to tax policies, Trump introduced tariffs on Chinese goods, a policy that Biden has largely continued. Looking ahead, the next President might adopt a combination of tariffs and other economic measures to stimulate growth. If Republicans win, their focus might shift towards fossil fuels, whereas Democrats are likely to advocate for renewable energy initiatives. Beyond taxes and tariffs, the next administration’s spending priorities—whether centered on energy, infrastructure, or defense—will also play a critical role in shaping investments and sector performance.
Also, the future of Social Security, Medicare, and Medicaid is crucial for individuals and businesses relying on these programs. Next, healthcare, the future of the Affordable Care Act and broader healthcare policy will impact the healthcare sector and related industries. Additionally, regulation changes could affect various sectors, including finance, technology, and environment. And shifts in immigration policy can influence labor markets and economic growth. Last but not least, geopolitical conflicts could impact global markets and economic stability (U.S. Bank 1).
Strategies for Mitigating Risk and Capitalizing on Opportunity
The main things to keep in mind in order to navigate the market, includes number one, focusing on the fundamentals, arguably the most important. Additionally, staying updated on election news such as polls, legislative balance shifts, unexpected events, and policy proposals (Forbes 1). Analyzing specific sectors and the overall market while reviewing current investments and if they may get highly impacted by the election can be beneficial. Also, adjusting your portfolio to lower risk or less volatile investments such as utility sector based stocks, or keeping certain stocks part of your portfolio if they have long-term potential and are only down short-term can be a great move. Using put options as well as shorting stocks can allow for investors to make profit towards the downside if there is a downtrend. Lastly, plan for all situations, keep risk management such as stop losses and diversification. Also, keep in mind that the election can sometimes have a very minor impact on the market and many trends and price action can be more connected towards other factors such as the state of the economy, interest rates, inflation and corporate profits.
The 2024 U.S. presidential election can be significant towards shaping the country, including stock market impact. The scheduled September 10th presidential debate between Harris and Trump is an opportunity to get further insight coupled with current analysis of the market, economic factors, and the election news. Ultimately, while navigating these uncertain times can be challenging, the ability to analyze the fundamentals, adapt and seize opportunities will empower investors to thrive, regardless of the election’s outcome. Embrace the changes with an open mind, and remember that even in uncertain times, there’s potential for positive outcomes.
