As we enter the second half of the year, the world’s attention is turning to the blockbuster event of the political calendar: the US presidential election in November. Judging from previous election years, we can expect volatility to increase as investors and traders try to predict who the winner will be and what impact their policies will have on the markets.
An analysis of historical market performance over almost 100 years from 1928 to date by Ninety One shows that US equities tend to become increasingly volatile from July in election years, with volatility peaking in November and then dropping off sharply in December. This is because markets dislike uncertainty and move sharply up and down as investors try to anticipate the potential outcomes.
Only once there is clarity as to who is elected as president will markets tend to stabilise and thereafter it will be other macroeconomic factors that are likely to determine their course. It is also important to note that the exaggerated daily and monthly market movements characteristic of an election year don’t typically have as much bearing on annual performance as one might think.
Markets perform no worse than usual in election years
Markets are no more or less likely to deliver losses in an election year than they are in any other. Morgan Stanley data shows that up to 2016, 19 of the 23 election years (83%) provided positive performances. In the years when the S&P 500 index ended down, it was for reasons unrelated to the presidential race, like the bursting of the dot-com bubble (2000) or the Global Financial Crisis (2008).
More recently, the S&P 500 delivered a return of more than 16% in 2020, the last time that Joe Biden and Donald Trump contested for the presidency. This was despite the coronavirus market crash in March of that year. It wasn’t Biden winning the presidency that swung the markets into the black by the end of the year – it was fiscal and monetary stimulus, combined with optimism about vaccines being able to contain the spread of the pandemic.
Now four years later, with Biden* and Trump squaring off again, many of the lingering macroeconomic effects of the pandemic are still with us. The loose monetary policy implemented during the pandemic, followed by the subsequent inflationary environment and interest rate hikes, have arguably had a larger bearing on the real economy and asset performance than anything Biden has done.
We therefore, feel comfortable saying that the level of economic growth; the Fed’s success in dampening inflation; and the pace of interest rate cuts, will most likely have a bigger impact on the direction of equities and other assets post the election result than who actually wins the 2024 presidency. That is, of course, barring a black swan event like another pandemic, a major global conflict, or interference with the independence of the Fed by the newly elected US president.
Sectoral winners and losers may differ by president
This is not to say, however, that the presidential race is of no importance. Judging from their previous histories, we can infer which sectors might be bigger winners and losers, depending on who occupies the White House. Trump’s policies tend to favour financial, energy, industrial, aerospace, and defence stocks, whereas infrastructure stocks did well following Biden’s victory in 2020.
We can also speculate about how the president’s policies might affect the macroeconomic climate in the medium term. Trump’s anti-migration stance and promise to impose steep tariffs on imports could feed inflation and, in turn, slow down the interest rate-cutting cycle. This might be negative for equities, notwithstanding Trump’s preference for lower taxes and less regulation for corporates.
Other factors that might worry markets about a Trump presidency include an undermining of the rule of law. As president, Trump may well seek to overturn convictions of those involved in the 6 January 2021 attack on Capitol Hill and terminate the many legal cases he faces. In the longer term, this could damage the US’s reputation as a safe haven for capital.
There is also the possibility that a Trump presidency will further inflame an already heightened geopolitical risk environment. It is uncertain how his stance on NATO and the Middle East could further destabilise the rules-based international order at a time when it is already under growing strain. Paradoxically, this could be positive for the dollar and US treasuries as safe haven assets, a phenomenon we have witnessed numerous times in the past.
Overall, we believe it is clear that market impacts from a Democrat president would be more predictable and neutral than four years under a capricious Trump. Yet we also contend that the US government will most likely remain divided and, hopefully, constrain the worst excesses of whichever candidate wins.
The resilience of long-term market performance
US election outcomes typically don’t drive market outcomes over the long-term. Even if it is important to adjust investing and financial strategies according to the prevailing climate, one should not be unduly distracted by short-term noise. An optimised portfolio with actively managed quality funds and index tracker components should offer a combination of risk mitigation and growth, no matter how the 2024 presidential race unfolds.
*There is a large possibility that Biden might drop out of the presidential race due to concerns about his age and health. However, we believe his possible successors would most likely continue to follow similar economic policies.
