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As the 2024 presidential election takes center stage, a natural question arises as to how the result will impact financial markets. In light of an election’s social and cultural consequences, it is easy for investors to exaggerate the president’s effect on the markets. This concern is likely misplaced. More often, what investors do not or cannot expect has the most drastic impact on invested capital. Investors are more likely to be hurt by exogenous events or their own psychological biases during an election year than the outcome itself. As the 2024 presidential election rapidly approaches, investors should consider three key factors:
1. Markets are largely unaffected by the U.S. president.
Irrespective of which political party is in the White House, history shows that stocks, given time, trend upward. While a U.S. president can have a marginal impact on returns, economic context matters far more for the markets. Financial shocks like the dot-com crash or the 2008 global financial crisis, as well as other exogenous events such as COVID-19, account for the largest swings in the markets – even though these shocks are little more than short-term hiccups for long-term investors. Although there is undoubtedly a relationship between public policy and the economy, many financial shocks result from the confluence of policy decisions and their corresponding economic impacts, both of which occurred many years (and presidential administrations) before the effects are visible. Policy decisions trickle into economic or societal impact over time.
Furthermore, volatility remains generally stable during elections. The volatility that does exist during election years is more often caused by outside forces, as indicated in the chart below.
2. Politically-driven investment themes are unreliable
Some investors try to identify investment themes based on the current political party in power. For example, investors might assume that clean energy would outperform under the Biden administration while oil and gas would be the star under the Trump administration. In reality, the opposite was true: clean energy outperformed oil and gas under Trump, while clean energy underperformed oil and gas under Biden.
The chart below illustrates the importance of process over prediction.
By relying on preconceived notions of what the market “should” do in certain political environments, investors oversimplify the limitless inputs of what prompts market movement. In this case, attempting to time the markets based on what should have happened would have led to unexpected results. Figure 2 depicts how a politician’s policies, in isolation, cannot predict outperformance in particular sectors. Investors risk overlooking unforeseeable variables such as the Russia/Ukraine war, domestic oil production, warmer winters, and OPEC decisions, to name a few.
3. Markets favor the patient investor
American investor Peter Lynch once said, “The key to making money in stocks is to not get scared out of them.” Investors often express this sentiment with clichés such as “stay the course,” “weather the storm,” and “investing is a marathon, not a sprint.” This is easier said than done, as news and media outlets attempt to spur outrage and clicks during an election season. This difficulty underscores the importance of creating an investment plan, implementing it consistently, and focusing on the long term. Investors who use a custom portfolio adapted to their unique needs and risk tolerance are rewarded for their disciplined forethought. Trading in and out of markets is more likely to hurt your portfolio than any election result. As Figure 3 shows, investors who withdraw their money in the latter half of an election year are far worse off than investors who stay fully invested.
Election years can feel uncertain and dangerously volatile, but history is clear: Markets are rarely, if ever, materially impacted by the results of an individual election. The margin for error when making considerable adjustments in asset allocation is razor-thin. By separating emotions and anecdotal headlines from portfolio decisions, investors position themselves to participate in investing success over the long term. The greatest dangers to a portfolio during an election year are either external events or the investor’s own actions. An election year makes staying the course more important than ever.
Peter Girard is a Manager at Innovest Portfolio Solutions as well as a member of the Due Diligence Group and the Capital Markets Team. The Due Diligence Group is responsible for sourcing investment managers as well as monitoring recommended products and strategies. Additionally, this group utilizes both quantitative and qualitative analysis while evaluating performance, understanding return attribution, and meeting with management teams. Peter also supports the Capital Markets Team by providing research on the capital markets and performing asset allocation studies. In addition to his due diligence and capital markets responsibilities, Peter focuses his efforts on projects for Innovest’s nonprofit, family, and individual clients. https://www.innovestinc.com/peter-girard
Natalie Miller, CFA, M.S. is a senior analyst on the Research and Retirement Plan Teams. Her responsibilities include monitoring investment products and strategies, preparing asset allocation studies, and creating deliverables for Innovest’s clients. She also supports the Performance Reporting Team. https://www.innovestinc.com/natalie-miller
1 Vanguard https://investor.vanguard.com/investor-resources-education/article/presidential-elections-matter-but-not-so-much-when-it-comes-to-your-investments
2 Invesco “People Care about elections. Markets don’t”
3 Invesco, “Is the second half of election years bad for markets?”
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
