Election 2024: How Stocks Perform in Election Years
The 2024 presidential election may be one of the biggest market-moving catalysts this year. While both major parties had primaries, neither race was competitive, and Democrat Joe Biden and Republican Donald Trump quickly earned enough delegates to become the presumptive nominee in their party. Barring any extraordinary developments, the 2024 presidential race will be a rematch of the 2020 election.
This election year will bring several challenges for investors and politicians alike. Unfortunately, the S&P 500’s past performance during U.S. presidential election years suggests investors could see some lackluster returns in 2024. Here are some things to keep in mind this election year:
The S&P 500 has averaged a 7% gain during U.S. presidential election years since 1952, according to an LPL Financial study that includes data from the S&P 500’s precursor index. While a 7% gain is far from disastrous, it is also well short of the 16.8% average S&P 500 gain in the year prior to an election year. It’s also below the roughly 10% average annual total return for the U.S. stock market in the typical year. Of course, it’s important for investors to remember that past performance does not guarantee future returns, and there have only been 18 presidential elections since 1952.
The good news for investors in 2024 is that the S&P 500 has not declined during a presidential re-election year since 1952 and has averaged a 12.2% annual gain in re-election years. A presidential re-election year is the fourth year of a first-term president’s administration in which they are seeking re-election for a second term.
The presidential election is only one of many factors that influence the stock market during election years, but analysts say there is good reason for investors to expect strong returns in re-election years like 2024.
Presidents seeking re-election will often “prime the pump” by implementing fiscal stimulus measures and pro-growth regulatory policies to support the economy and the labor market.
The federal funds interest rate is currently at its highest level in more than two decades as the Federal Reserve continues its battle with inflation. Elevated interest rates increase borrowing costs for consumers and businesses, weighing on economic growth. U.S. gross domestic product grew 3.4% annually in the fourth quarter, but economists expect that growth rate to slow in 2024. While the chances of an imminent U.S. recession have fallen in recent months, the New York Fed’s recession probability model suggests there is still a 58.3% chance of a recession within the next 12 months.
To make matters worse, Biden may have limited opportunities to add economic stimulus measures in 2024, as Republicans control the House of Representatives and are unlikely to cooperate. However, the majority of the spending from the 2022 Inflation Reduction Act is slated for fiscal years 2024 through 2026, which could help support the economy and the stock market this election year.
Jeffrey Buchbinder, chief equity strategist for LPL Financial, says the Federal Reserve’s ability to navigate a so-called soft landing for the economy in 2024 will be the key to stock market upside and the election outcome.
“Those soft-landing prospects are brighter given it’s an election year, which could bring additional stimulus from the Biden administration, with or without congressional approval (regulatory actions, or inactions, can also provide an economic lift),” Buchbinder says.
“The White House is well aware that no U.S. president in modern history has been re-elected when a recession occurs during an election year.”
From a sector standpoint, the financial services and energy sectors have been top performers during presidential election years since 1973, according to Comerica Bank. The technology sector, which has been by far the top overall performer in the past 50 years during non-election years, has been one of the worst-performing market sectors during presidential election years. The materials sector is the only sector that has performed worse than the technology sector during election years.
Investors betting the pattern holds true again in 2024 can increase their allocation to financial services and energy sector exchange-traded funds, such as the Financial Select Sector SPDR Fund (ticker: XLF) and the Energy Select Sector SPDR Fund (XLE).
John Lynch, chief investment officer for Comerica Wealth Management, says the positions and policies of the candidates are largely what moves specific market sectors, and those platforms can change on an election-to-election basis.
“A major issue with sector implications in one election year may prove to be a non-factor in another election. Moreover, issues like ‘Medicare for All’ can have bifurcating effects on sectors with sub-industry winners and losers within the same sector,” Lynch says.
Different market sectors can also outperform depending on which candidate is leading in the polls, and it’s too early at this point for investors to anticipate a winner in 2024.
Given the two leading candidates in the 2024 election both have experience in the White House, investors can also take a look at how the stock market has performed during each candidate’s time in office.
Comparing Biden’s time in office to the equivalent period of time under Trump’s presidency, the stock market metrics mostly trend in Biden’s favor, according to an analysis by Facts First. The S&P 500 has gained 37.2% under Biden through April 3, compared to a 9.9% gain for Trump over the same period. The Dow Jones Industrial Average is up 26.5% under Biden compared to a 6.7% gain under Trump after the same number of days in office.
The Nasdaq under Biden is the exception, putting up gains of 23.3% compared to a 33.1% gain under Trump at this point in his presidency.
It’s easy to give Biden and Trump credit or blame for stock market performance during their respective presidencies, but the COVID-19 pandemic dealt extreme disruptions to the economy and the market in both 2020 under Trump and 2021 under Biden. These disruptions severely muddied the waters when it comes to economic and market performance data. For example, the U.S. economy averaged just 2.6% annualized GDP growth under Trump’s first three years compared to 6.6% under Biden. However, those numbers are both skewed by the outlier 2.7% GDP drop during the pandemic-related economic shutdowns in 2020.
This election year may prove to be unpredictable and volatile. Fortunately for investors, analysts are generally optimistic about the outlook for stock prices for the year ahead.
According to FactSet, as of March 21, industry analysts put a 12-month target of 5,589.06 on the S&P 500, implying 7% upside from the prior day’s 5,224.62 closing level. Analysts saw health care (+10.2%) and real estate (+10%) as the two industries with the highest upside.
All in all, betting on one particular sector over another for historical reasons merely due to 2024’s status as a presidential election year may be foolish. The thesis that re-election years tend to be good for markets more broadly, however, seems a bit stronger. It’s a good bet that markets will end with a gain this calendar year, but with the S&P already leaping 10.2% in the first quarter, the question is how much upside remains in the months ahead.
Wall Street analysts, for one, seem to think there’s still some room left to run.
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