The 2024 presidential election may be one of the biggest market-moving catalysts in the next six months.
It’s too early to speculate about a potential winner, and the recent exit of President Joe Biden has added an extra layer of uncertainty to this election season. At this point, former President Donald Trump is leading Vice President Kamala Harris, the presumptive Democratic nominee, in most national polls. However, the Harris campaign has just begun, and a lot could change between now and Nov. 5.
[Sign up for stock news with our Invested newsletter.]
The remainder of the election year will bring several challenges for investors and politicians alike. Unfortunately, the S&P 500’s past performance during U.S. presidential election years suggests investors could experience some lackluster returns between now and the end of the year.
— S&P 500 performance in election years.
— 2024 election cycle chaos.
— Economic performance under Biden versus Trump.
— 2024 investing strategy.
S&P 500 Performance in Election Years
The S&P 500 has averaged a 7% gain
during U.S. presidential election years since 1952. While a 7% gain is far from disastrous, it is also well short of the 17% average S&P 500 gain in the year prior to an election year. It’s also below the roughly 10% average annual total return for the S&P 500 in the typical year. Of course, it’s important for investors to remember that past performance does not guarantee future returns, and there have only been 18 presidential elections since 1952.
The federal funds interest rate is currently at its highest level in more than two decades as the Federal Reserve continues its battle with inflation. Elevated interest rates increase borrowing costs for consumers and corporations, weighing on economic growth. U.S. GDP grew 2.8% in the second quarter, but economists expect that growth rate to slow. While the chances of an imminent U.S. recession have fallen in recent months, the New York Fed’s recession probability model suggests there is still a 55.8% chance of a recession within the next 12 months.
From a sector standpoint, financial services and energy have been top performers during presidential election years since 1973. The technology sector, which has been by far the top overall performer in the past 50 years during non-election years, has been one of the worst-performing market sectors during presidential election years. The materials sector is the only sector that has performed worse than the technology sector during election years.
Investors betting the historical pattern holds true again in 2024 can increase their allocation to financial services and energy sector exchange-traded funds, or ETFs, such as the Financial Select Sector SPDR Fund (ticker: XLF) and the Energy Select Sector SPDR Fund (XLE).
Different market sectors can also outperform, depending on which candidate is leading in the polls, and it’s too early at this point for investors to anticipate a winner in 2024.
2024 Election Cycle Chaos
As if a typical election year weren’t volatile and unpredictable enough for investors, this year’s election cycle has already featured two unique headlines. On July 13, Trump survived an assassination attempt in Butler, Pennsylvania. Less than two weeks later, Biden announced he would not seek re-election, opening the door for Harris as the presumptive Democratic nominee.
A sitting president not seeking re-election and an assassination attempt on a major party nominee in the same year may seem unprecedented. But in reality, Americans saw very similar circumstances back in 1968. In March of that year, sitting Democratic President Lyndon Johnson opted not to seek re-election due to low favorability ratings. Incredibly, presumptive Democratic nominee Robert F. Kennedy was assassinated less than three months later.
What can 1968 tell investors about 2024? Surprisingly, the S&P 500 took all the political chaos of 1968 mostly in stride. The S&P 500 rallied 15% during the period between Johnson’s announcement through the end of the year, which concluded with the election of Republican Richard Nixon. At the end of 1968, the S&P 500 had gained 7.7% for the year and generated a total return of 11%, slightly above average for the index.
There is also a strong argument the U.S. economy is better positioned today than in 1968. In that year, real GDP grew 4.9%, but inflation was rising. In 2024, inflation is falling, and investors expect Federal Reserve interest rate cuts ahead that could stimulate the economy.
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, says the U.S. economy is much stronger than people realize heading into the election.
“The 2.8% growth in the economy above and beyond inflation is very impressive, and the recent pullback in stocks will likely prove to be a buying opportunity,” Zaccarelli says.
“More volatility is to be expected — especially as we get closer to the election — and as long as the economy avoids a recession, then this bull market will continue through 2024 and well into 2025, so we would take advantage of any pullbacks along the way.”
Economic Performance Under Biden vs. Trump
Given the two leading candidates in the 2024 election both have experience in the White House, investors can also take a look at how the stock market has performed during Trump’s four years as president and Harris’ three-plus years as vice president.
During Trump’s presidency, the S&P 500 gained about 14.1% annually. Under Biden and Harris, the S&P 500 has gained about 10.8% annually.
One of the major reasons market returns have been more muted under Biden is inflation. In the first 41 months of Trump’s term, cumulative inflation based on the consumer price index (CPI) was 5.4%. Under Biden’s first 41 months, cumulative CPI inflation was 19.9%.
It’s easy to give Biden, Harris and Trump credit or blame for stock market performance during their respective administrations, but the COVID-19 pandemic dealt extreme disruptions to the economy and the market in both 2020 under Trump and 2021 under Biden. These disruptions severely muddied the waters when it comes to economic and market performance data. For example, the U.S. economy averaged just 1.4% annualized GDP growth under Trump compared to 3.5% during the first three years of Biden’s administration. However, those numbers are both skewed by the outlier 2.8% GDP drop during the pandemic-related economic shutdowns in 2020.
The caveats surrounding credit and blame for economic performance are taken one step further when it comes to Harris. Presumably, her economic policy platform would be closer to Biden’s than Trump’s. But as vice president, Harris likely hasn’t been directly responsible for many of the economic policy decisions during Biden’s administration.
2024 Investing Strategy
The remainder of this election year may prove to be unpredictable and volatile. Fortunately for investors, analysts are generally optimistic about the outlook for stock prices in 2024.
The consensus analyst price target for the S&P 500 is currently 6,133, which represents a roughly 13.6% upside from its July 25 closing value over the next 12 months. On a sector basis, analysts see the most valuation upside for the communication services sector (22.1%) and the least amount of upside for the real estate sector (8.4%).
Yung-Yu Ma, chief investment officer at BMO Wealth Management, says the recent outperformance in small-cap stocks will likely continue for the foreseeable future.
“Earnings growth among smaller companies is set to improve by year-end, and the Fed will soon begin a year-long rate-cutting campaign, which will disproportionately benefit smaller companies,” Ma says. “If Trump wins the election, then the prospect of tariffs and trade shocks hurting large companies could also add to the rotation into smaller companies as it did in the aftermath of Trump’s 2016 victory.”
David Bahnsen, chief investment officer at the Bahnsen Group, says Biden dropping out of the race increases market uncertainty. However, he says the election should not be a top priority for investors in the second half of 2024.
“Right now, the markets have already priced in a slight Republican majority in the Senate, which is very likely, and that will calm any negative market impact from a potential Harris win. The election is not in the top three priorities in terms of market considerations, as earnings, Federal Reserve and geopolitics are a bigger driver of markets,” Bahnsen says.
[Read: Will the Stock Market Crash in 2024? 6 Risk Factors]
More from U.S. News
Donald Trump Stocks: 8 Stocks Owned by the GOP Nominee
8 Top Nancy Pelosi Stocks to Buy
2 ETFs for Tracking Congressional Stock Picks
Election 2024: How Stocks Perform in Election Years originally appeared on usnews.com
Update 07/31/24: This story was published at an earlier date and has been updated with new information.
