2024 Election Uncertainty Could Drive Fixed-Income Outperformance

Report Highlights

  • The S&P 500 typically performs better January-October in non-election years than in election years, and better in election years after the election is decided. Thus far, this year is atypical.
  • We believe the market has yet to fully engage with the election narrative as there is usually more uncertainty over the nominees. But other uncertainties are waiting in the wings.
  • The U.S. Economic Policy Uncertainty Index has averaged 17 percent higher in presidential election years than non-election periods, and this year promises to accelerate the recent trend.
  • The 2024 election is also occurring in a period of high global geopolitical instability, as indicated by the Geopolitical Risk Index.
  • In periods of heightened economic policy and geopolitical uncertainty, higher quality bonds tend to outperform equities and exhibit lower volatility.
  • History also shows that we should not expect the Federal Reserve (Fed) to change its policy execution strategy because of the election, nor should we expect it to tip the scales one way or the other.
  • With uncertainty likely to rise and the Fed expected to cut rates later this year, investors should consider increasing allocations to strategies invested in higher quality fixed income.

Election Year Equity Returns Typically Stay Subdued But Rise After November

Numerous studies have examined how risk assets fare in election years. Our analysis shows that presidential elections have weighed on risk assets in the months leading up to the election. Since 1985, the S&P 500 index has generally performed better between January and October in non-election years than in election years, with an average return of 12 percent in the former compared to less than 1 percent gain in the latter. The market performed better after the elections take place in November, as the removal of uncertainty has had a positive effect. This insight should help investors set realistic expectations for election years to strategize for potential volatility between January and November, and to understand the typically transient impact of elections on markets.

equities outperformed

That said, this year is atypical. The S&P 500’s current year-to-date performance through January exceeds the typical trajectory for an election year, recording a 5 percent increase and setting new record highs. Absent additional context, the market appears poised to defy historical precedent and deliver strong gains despite a major election looming. It is possible that diminishing fears of a U.S. recession and anticipation of rate cuts are overshadowing the usual election-related uncertainties that tend to constrain risk assets.