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In 2024, the US elections could once again see voters choosing between Trump and Biden. With so many differences between them in terms of policies and approach, the outcome of the election could have a significant impact on the economy. In addition, this can affect market returns both during and after the election.
Read on to learn how the election and its outcome could affect markets.
Equities tend to underperform in an election year, but often bounce back afterwards
Though past performance is no guarantee of future performance, equities have historically underperformed in an election year.
US Bank analysts reviewed S&P 500 data from the 1930s onwards to discover that equities averaged below 6% in an election year versus around 8.5% on a non-election year. Bonds behaved in a similar manner, averaging around 6.5% in an election year compared to around 7.5% in a non-election year.
After an election, volatility is usually confined to specific sectors as a result of policy changes rather than the market as a whole. Healthcare and energy are areas where political parties tend to have differing approaches, so new policies could affect performance in these sectors.
A Biden re-election could see greater economic stability but lower market returns
Over the past three years, under Biden’s leadership, the US economy has gone from strength to strength. Inflation has fallen and the labour market is in good shape.
Market returns haven’t fared quite so well. According to data reported by Schroders, if you had a portfolio that comprised 60% equities, 30% 10-year US Treasury bonds, and 10% cash, your returns since the start of Biden’s presidency would be 8.5%. At the equivalent point in Trump’s presidency, you’d have experienced returns of 35%.
This may not improve if Biden were to win a second term. The Schroders report shared that market returns tend to be lower under returning presidents with the exception of 10-year Treasury yields.
That said, a report from Yahoo Finance suggests the recession economists feared at the start of 2023 is now far less likely as a result of economic outperformance. Historically, when interest rates are hiked to control inflation, a recession follows, but the prospect of a “soft landing” for the economy in 2024 and beyond seems increasingly likely as inflation falls.
If re-elected, Biden’s policies might include revisiting his Build Back Better Act. This pledged investment in affordable housing, immigration reform, childcare, and paid family and medical leave, though much of this couldn’t be fulfilled in his first term.
A second Trump presidency could create more uncertainty on the markets
While Biden can certainly feel optimistic about his chances of re-election, the most recent polls suggest Trump could give the president a run for his money if he wins the Republican nomination.
As you’ve read above, market returns were higher under Trump’s presidency than they are at present, but if he were to be re-elected, uncertainty seems likely. The prospect of potential incarceration aside, history shows that a Trump presidency could be highly unpredictable.
So far, Trump has mentioned his intention to reduce inflation and invest in US energy production.
The Independent reports that Trump told 30,000 lies while he was in office last time – that’s almost 21 a day – including misleading statements about the performance of the economy, the unemployment rate, and the level of tax cuts he had implemented. Politifact analysis showed that 53% of his election promises were broken, compared to Obama’s 24%.
According to the Schroders report, this could create increased uncertainty for stock markets if Trump were to win the election in 2024. When uncertainty rears its head, investors can be tempted to abandon more risky equities in search of a safe haven, such as gold or government bonds.
A split Congress could lead to higher returns on equities
Of course, there’s a chance that the next president may need to work with a split Congress if their party doesn’t win the majority.
A Reuters report explains that a split Congress often leads to more moderate policies, because the two parties must compromise on their approaches. This usually creates more stability in the economy. Consequently, investors feel reassured and this helps to avoid stock market volatility.
External factors can affect economic and market conditions
While historical data and trends can help you to consider the possible effects of the US election on stock markets, there are countless factors that can affect investment performance. It’s simply not possible to accurately say how markets will respond to the election, no matter who is elected.
In addition, it’s important to remember that volatility or uncertainty caused by global events like an election is unlikely to last. While past performance is no guarantee of future performance, historically it’s been the case that staying invested through market volatility usually helps you to take advantage of the general upward trend of the markets.
So, no matter what the outcome of the election turns out to be, try to focus on your own long-term goals when making investment decisions rather than short-term conditions on the stock market.
Get in touch
If you’re concerned about how global events could affect your investments, we can help.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
