As well as being a dramatic year politically, this year has been well above average in terms of the magnitude of stock market performance. Directionally, however, it has been typical of a presidential election year — overall positive with a summer dip. If 2024 follows a similar pattern, then we could notice stocks struggle through much of October until much closer to the election. In election years, on average, stocks typically find a bottom from the late summer jitters right around a week before the election.
Stocks Tend to Dip Before Election Day, Before Strong Performance into Year-end
S&P 500 | Daily Progression (1950-2024 YTD)
Source: LPL Research, Bloomberg, FactSet 09/30/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.
The third quarter of the final year of a presidential cycle is typically a below-average environment for stocks, as markets typically assess each candidate’s policies and chances of success in the upcoming election. Getting through this quarter, especially in a year where the presidential race is so close, with a more than 5% gain for the S&P 500 is well above average (+1.5%). Good news for stock investors is the final quarter of the presidential election cycle has one of the highest proportions of positive returns (83.3%) even if the average returns are more middle of the road (+2.5%). Markets generally react positively to the degree of uncertainty that is removed following the presidential election result, even if the full details of policy in the years to come are still not fully defined.
Q4 of a Presidential Election Year is Generally Good for Stocks
S&P 500 Quarterly Performance By Presidential Cycle (1950 - 2024)
Source: LPL Research, FactSet 04/01/2022 (1950 - 2021)
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.
The S&P 500 Index is up around 20% year-to-date, which may be a good sign for stocks coming into the fourth quarter. But how does this compare to prior presidential cycles? The magnitude of this year’s return is greater than the average year four of the presidential cycle (+7.3%) but overall, the ranking of years has been similar with President Biden’s second year being by far the weakest for markets (-19.4% in 2022).
2024 Year-To-Date Return Exceeds Average Presidential Election Year
S&P 500 Index Average Yearly Returns (1950 - 2024)
Source: LPL Research, FactSet 12/13/21 (1950 - 2020)
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.
Much is made of the presidential election and how policies may affect the economy and the stock markets, but some of our favorite charts show that historically markets don’t have a strong preference for one party over the other. Markets like certainty, even if that certainty derives from the status quo amid political gridlock. For this reason, stronger returns tend to happen under a divided government. Most strikingly when looking at Congress alone, average returns when Congress is split are 14.9% compared to just 8% when one party controls both the House and the Senate, underscoring the power of Congress to decide policy. Including the president in the equation, when one party holds the trifecta of president, House of Representatives and the Senate, average returns are closer but still favor power sharing (8% average for the trifecta versus 9.7% for power sharing).
Stocks Like the Certainty That a Split Congress’s Gridlock Brings
Average S&P 500 Annual Return (1950 - 2024 YTD)
Source: LPL Research, Bloomberg 11/10/2022
Disclosures: Data are from 1950–2021. All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
Can Stocks Predict the Election?
Historically, stocks have a good track record of predicting the presidential election result. The S&P 500 return in the three months leading up to the election has correlated with the incumbent party winning 80% of the time since 1928 (the incumbent party wins if stocks are up, and vice versa). Based on this metric along with strong stock market gains since August 5 point to Vice President Harris as the incumbent candidate with four weeks to go.
Additionally, stocks seem to sniff out the potential for change, with stocks down 2.2% in Octobers when the incumbent party loses compared to a 0.8% average gain in October when the incumbent wins. If October is down more than a fraction, the incumbent party has lost eight out of nine times since 1952, with President Obama in 2012 the only incumbent to survive a more than marginally negative October (-2.0%), with stocks being up big through September that year (+14.5%) providing a mitigating tailwind.
Summary
The election is expected to increase short-term market volatility, with historical correlations suggesting potential stock market fluctuations tied to political uncertainty. While differing candidate policies could create specific investment opportunities across areas such as trade, energy and fiscal policy, we believe that bonds may offer diversification and stability amid policy uncertainty. More strategically, stocks have performed well under presidents from both parties, with political gridlock the preferred outcome.
For a more comprehensive analysis of how the U.S presidential election may impact your own personal investments, please feel free to set up a call or an appointment so that we can take the time to review your unique situation.
Bryan Foronjy, CFP®
Founder and Principal Wealth Manager
Foronjy Financial
CA Insurance Lic. # 0F84170
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