In numerology, the number 47 signifies stability and harmony. As we embark on an election year in 2024, such tranquility seems out of reach in the run-up to the election of the 47th president of the United States. For the next six months, investors will be inundated with opinions and predictions about the impact of the election on policies and markets. It’s tempting to react to the constant stream of what may seem like new information, but we expect patience and a long-term view will be rewarded. Financial markets tend to calm down once the electoral dust settles, regardless of the victor.

Indeed, history demonstrates that the impact of elections on markets is short-lived. But that does not mean investors should not bother thinking about and preparing for the outcome. In that vein, we are publishing a two-part series. In this first piece, we study the impact of elections on the stock market and explore how political affiliation impacts investor sentiment. In part two, to be published later this summer, we will explore investment strategies that are oriented for success under the likely policies of either candidate.

To kick off our first piece, let’s look at historic election cycles and the S&P 500 Index. Several patterns emerge:

1. Stocks are more volatile than average during election years. During election years, the stock market typically suffers a decline of about 17% before Memorial Day and recovers in late summer as a likely winner emerges. In non-election years, the typical sell-off is 13% and comes after May.[1]
2. Stocks don’t necessarily do worse during election years. Full-year returns are about the same (7.5%) as in non-election years (8.0%).[2] The best returns tend to come during the pre-election year, and the worst returns come during the second year of the president’s term.
3. Stocks tend to rally when an incumbent runs for re-election, likely because incumbents extend favorable policies on taxes and spending.
4. Elections impact sectors differently. According to Ned Davis Research, high-beta and cyclical stocks tend to outperform defensive sectors during election years, while stocks in industries facing regulatory risk tend to underperform.[3]
5. The stock market is a leading indicator of the election outcome. Historically, if the S&P 500 is higher in the three months before the election, the incumbent party wins, and if stocks are lower in the three-month period, the opposition party has won. This has been true in every presidential election since 1984 except one (2020), and 83% of the time since 1928. [4]

While election year patterns can be observed, there doesn’t seem to be a consistent pattern in stock market performance under different political regimes. On average, the stock market has risen at a faster rate when Republicans have controlled both Congress and the White House. However, the sample size is so small as to be inconclusive, with only eight instances post World War II. The Democrats controlled both the House and Congress nearly three times as often, and during those years, both stock returns and GDP growth were above average. Even during periods of a divided government, markets gained 7.9% on average and the strongest returns were experienced under a Democratic President, Republican controlled House and a Democratic led senate.[5]