The 2024 U.S. Presidential Election is now less than one year away!
While we look for market volatility to intensify as sensational political headlines and escalating geopolitical tensions affect investor sentiment, a focus on the fundamentals of elevated interest rates, moderating inflation and recovering profits should enable long-term, diversified portfolios to stay on course for their investment objectives.
The primary season officially kicks off in Iowa on January 15th. Until clarity emerges next summer on political party nominees and their platforms, we thought it was important to provide investors with perspective on traditional trading patterns, economic trends and market signals to help prepare for the typical election year volatility.
Indeed, the four-year presidential cycle offers relatively consistent patterns regarding government spending, economic activity and equity market performance.
Special thanks to our friends at Strategas Research Partners for their valuable insights and voluminous data!
Perhaps the most dangerous chart to present, given the risk of a jinx – since 1952, the S&P 500® has never declined in a presidential re-election year. See chart: Annual S&P 500® Price Returns in Presidential Election Years.
Indeed, the only three times (1960, 2000, & 2008) the index fell were years in which both parties offered new candidates, otherwise known as an “open” presidential election with no one running for re-election.
It stands to reason that a new, or first-term president wants to be re-elected. In addition, the political party of first-term presidents typically suffers losses in mid-term congressional races. The combination of these two dynamics often results in increased domestic spending to “prime the pump” for economic growth and improved voter sentiment in year three of the presidential election cycle, with the hope that the stimulus feeds into the economy in the fourth (election) year. See chart: Presidential Cycle Average S&P 500® Returns – Re-elected vs. New President.
As a result, the best performing year for equities of the four-year presidential cycle is year three, as investors discount the effect of favorable policy trends, including increased domestic spending. New, or first-term presidents average better equity market returns in the third and fourth years than second-term, or re-elected presidents.
We believe this is consistent with the “prime the pump” re-election efforts of first-term presidents and economic growth confirms these policy efforts. Of the four-year presidential cycle, real GDP growth is strongest during the election year of first-term presidents, followed by even stronger expansion in the first year following their re-election. See chart: Average Annual % Change in Real GDP by Presidential Cycle Year.
To be sure, every president who managed to avoid recession two years before their re-election went on to win a second term. Perhaps not surprisingly, every president that experienced recession within two years prior to their re-election ended up losing the contest.
A pattern has also emerged relative to equity market performance and the outcome for the incumbent party candidate. See chart: S&P 500® Average Performance in Election Years & Incumbent Party Result.
Equities typically outperform in presidential election years when the incumbent party wins. Again, it stands to reason that if the economy and markets are performing, voter sentiment is likely behind the sitting president. Of course, if the economy weakens, stocks decline. Yet, the pattern for an incumbent loss involves two separate selloffs during the election year – during the height of primary season (early spring) and following the conventions in late summer.
As evident in the Incumbent Party chart above, equity performance leading up to the presidential election tends to be a strong market signal regarding the outcome. Strategas notes that since 1928, performance of the S&P 500® in the three months prior to the election has been a great predictor of the result, with 83.0% accuracy!
Of the 24 presidential elections since 1928, 20 times the direction of the Index telegraphed the election outcome. If the S&P 500® was positive in the three months leading up to the election, the incumbent party typically won. Of the four times this indicator was incorrect, the Index was up, but the incumbent still lost.
From a sector standpoint, patterns emerge but it is important to note that positions of the candidates in any given election year can vary from other years with different candidates. A major issue with sector implications in one election year may prove to be a non-factor in another election. Moreover, issues like Medicare-for-All can have bifurcating effects on sectors with sub-industry winners and losers within the same sector.
Over the past 50 years, the Financial Services and Energy sectors have enjoyed the highest average annual returns during presidential election years. The Technology and Materials sectors, typically strong performers in non-presidential election years, tend to struggle in year four of the election cycle. See chart: Average S&P 500® Sector Performance.
Of course, a variety of factors can affect market sentiment in any given year. Over the next 12 months, geopolitical tensions are likely to remain high, economic growth may moderate and all eyes will be on the Federal Reserve. Yet, political headlines will escalate as the presidential primary season officially begins on January 15th in Iowa. The first half of next year will likely be fraught with speculation relative to candidates, party and platforms until the conventions next summer. As clarity emerges, we will provide investors with more insight relative to potential economic and market implications.
In the meanwhile, we hope these charts offer investors some perspective in the event of heightened market volatility next year.
Be well and stay safe!
Chief Investment Officer
Comerica Wealth Management
Director Portfolio Management
Comerica Wealth Management
Comerica Wealth Management
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Source: Unless otherwise noted, all statistics herein obtained from Bloomberg.
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