Oct 24, 2024 3:05:54 PM
“The wind is rising, and the air is wild with leaves. We have had our summer evenings; now for October eves!”
— Humbert Wolfe
October is one of those months where you don’t need a calendar to know it’s here. Whether it is the first temperature readings in the 30s on my morning run or the Halloween decorations popping up in the neighborhood, it’s clear what month it is. But every four years it becomes even more apparent given the campaign commercials that run nonstop as we approach Election Day. Whether you’re watching the news or a prime-time drama, the ads keep coming—for presidential candidates, a Senate race, ballot questions, and even candidates running in a neighboring state!
The good news is the political frenzy will soon pass. We are now just 12 days from Election Day on November 5. According to the polls, the race is still too close to call. The seven swing states that are likely to decide the election all seem to be within the margin of error. It could be a long night of vote counting.
The Personal Side of Politics
The election is important to most of us on a personal level. We are choosing the leader of the free world and the person who is viewed as having more power than anyone else across the globe. Not to mention the impact the president might have on our day-to-day lives.
The chart below shows the confidence in the economy by political party. People who are affiliated with the party that is represented in the White House always think the economy is better than those in the party not represented. Somehow, those opinions tend to change around elections. For the most part, the economy moves slowly, and its prospects for growth don’t change overnight. But people’s views of the economy change very quickly if there is a change in control of the White House.
Folks affiliated with the party that is now in power have a much better view of the economy, while the party that thought the economy was doing pretty well in October now thinks it isn’t so great.
Source: Pew Research Center, J.P. Morgan Asset Management. The survey was last conducted in May 2024, “Public’s Positive Economic Ratings Slip; Inflation Still Widely Viewed as Major Problem.” Pew Research Center asks the question: “Thinking about the nation’s economy, How would you rate economic conditions in this country today…as excellent, good, only fair, or poor?” S&P 500 returns are average annualized total returns between presidential inauguration dates and are updated monthly. Real GDP growth are average annualized DGP growth rates. Guide to the Markets – U.S. Data are as of September 5, 2024.
These reactions help us understand why the election is so important to most of us personally. And because it is, we naturally assume it is important to the markets as well. But is that really the case?
The Short-Term Impact of Elections on Markets
Through a short-term lens, markets have tended to perform well after an election, no matter the outcome. The chart below shows S&P 500 returns over the two years post-election. It includes over 60 years of data dating back to the second reelection of Franklin Roosevelt through the two years after our last presidential election in 2020. It clearly shows that, historically, stocks have gone up no matter the results in November in races for the White House, the Senate, and the House.
There are certainly degrees of outperformance across the possible outcomes, and investors have favored gridlock in our power-sharing arrangement. But a pending election shouldn’t be a reason to reduce equity exposure in the short term.
What About the Long Term?
We also need to take the long view, as some presidents serve two terms for a total of eight years. That is a long time to affect the business fundamentals of corporate America and ultimately the stock market.
The chart below dates to the first inaugural of Franklin Roosevelt, so it includes 70 years of data. Once again, it illustrates that over time markets have gone up despite what happens in the race for the White House, not because of it. Markets tend to go up when a Republican is president, and they have gone up when a Democrat is in the White House. They have done so through economic ups and downs, inflation fears, and geopolitical conflicts. Most administrations have a down year during their time in the White House, but taking the long view, stocks have risen without regard for what party is pulling the levers of power. Of course, past performance is no guarantee of future results.
Sources: Capital Group, RIMES, Standard & Poor’s. Chart shows the growth of a hypothetical $1,000 investment made March 4, 1933 (the date of Franklin D. Roosevelt’s first inauguration) through June 30, 2024. Dates of party control are based on inauguration dates. Values are based on total returns in USD. Shown on a logarithmic scale. Past results are not predictive of results in future periods.
https://www.capitalgroup.com/advisor/ca/en/insights/articles/how-elections-move-markets-5-charts.html.
Volatility Creates Opportunity
Of course, there are always things to worry about. For the most part, however, things look pretty good from a fundamental perspective. The economy and earnings continue to grow. These are the factors that tend to drive stock performance and currently appear to be providing a positive backdrop for markets.
There could certainly be some volatility around the election or as the votes are counted. But it is hard, if not impossible, to time markets. Volatility usually creates opportunities for those willing to take a longer-term view of the opportunity set. So, in these final days before the election, our advice remains this: vote in the booth, not in your portfolio.
© 2024 Commonwealth Financial Network®
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Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. Basis points (bps) is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.
