In 2024, the main uncertainty affecting the markets is the rate of inflation and its impact on the Federal Reserve’s interest rate policy. The looming question remains whether the Fed will cut rates and when, with events such as the geopolitical conflict in the Middle East also affecting stocks and bonds. Another event on the horizon that could bring volatility to the markets is the 2024 Presidential Election.
The election is a bit less of a mystery compared to previous years, as both candidates have already served a term as president. Polling indicates a potentially close election, with the biggest uncertainty being whether the loser will concede or attempt to reverse the outcome. As a result, investors may be tempted to shift exposure to risk-off leading up to November, especially with short-term Treasuries yielding above 5%.
Looking at historical data going back to 1953, the fourth year of the Presidential cycle has historically been positive for markets. However, there is a tendency for the market to pull back in the second half of the final year of a President’s term, with the Financial Crisis fallout in 2008 exaggerating this effect. Studies have shown that Democratic Presidents have seen better market returns compared to Republican Presidents, but outside factors can greatly influence these numbers.
The ideal outcome for investors looking beyond November may be a bit of gridlock in Washington. A US Bank study found that the best outcomes for the S&P 500 occurred when a Democrat was elected president, but Congress was partially controlled by Republicans. Despite the stress and uncertainty that comes with the looming election season, historical data suggests that presidential elections may have less of a causal effect on market returns and more of a coincidence.
As investors, it’s important to focus on other uncertain variables rather than getting caught up in the political noise leading up to the election. While the markets may experience volatility based on the outcome of the election, it’s important to remember that markets are forward-looking and trade on perceived future events that are inherently unknowable. So, don’t let the political ads and election drama distract from other important factors impacting market returns.
