The Impact of Presidential Elections on Financial Markets: A Deeper Dive
As the 2024 presidential race heats up, it’s essential to understand how the looming election impacts financial markets well before November’s vote. The anticipation of change, coupled with the uncertainty over who will win, significantly influences market behavior, affecting different sectors and asset classes in various ways.
Markets and the Fear of Uncertainty
Markets inherently dislike uncertainty, a sentiment that becomes particularly pronounced during election years. This aversion stems from the fact that each presidential candidate proposes different policies that could either benefit or hinder the economy and, by extension, the markets. For instance, analysis from Piper Sandler highlights how portfolio allocations for 2024 could vary widely depending on the election’s outcome, with certain sectors and assets preferred under one candidate (marked by green boxes) and disfavored under another (indicated by red boxes).
Election Year Dynamics: Lower Returns and Increased Volatility
The pattern of lower equity returns in election years, as opposed to non-election years, is well-documented, with research from PFG indicating that average returns during these periods are roughly half of what they are in non-election years. This trend is attributed to the market’s hesitancy amid policy uncertainty. Capital Group’s research further supports this, showing that equity markets tend to move sideways during primary season, only beginning to rise in summer as the candidate field narrows.
Moreover, the anticipation of elections is known to exacerbate market volatility. Bank of America’s data reveals a 25% increase in equity volatility (VIX) in the months leading up to an election, which then decreases nearly 20% in the month following the election, illustrating how uncertainty spikes before an election and eases once the outcome is known.
Significance of Macro Factors
While the immediate aftermath of an election might suggest a direct correlation between electoral outcomes and market performance, broader macroeconomic factors play a significant role. This is evidenced by the fact that post-election market performance does not strictly depend on the party change or reelection scenarios. Presidents Reagan, G.W. Bush, and Obama all experienced negative returns following their initial elections amid economic recessions but saw positive returns following their re-elections during economic expansions.
The influence of macro factors extends to IPO activity as well. Despite the lack of a clear relationship between elections and IPO volumes, significant drops in IPOs were noted during the 2001 recession and the Credit Crisis recession, coinciding with presidential transitions, and again with rate hikes in Q1 2022 under President Biden. This suggests that while elections matter, macroeconomic conditions such as recessions and Federal Reserve policies are more impactful on IPO activity.
Navigating the 2024 Election Year
As we approach the 2024 presidential election, the financial markets are expected to face higher volatility and potentially lower returns, characteristic of an election year’s uncertainty. However, the anticipated economic soft landing and potential Federal Reserve rate cuts could mitigate some of the election-related market fluctuations.
This deep dive into the interplay between presidential elections and market dynamics underscores the need for investors to consider both the political landscape and macroeconomic indicators. While elections indeed shape market sentiment and performance, the overarching macroeconomic environment holds considerable sway over the direction and health of financial markets.