An Election of Economic Import

When it comes to the markets and presidential elections, experts tend to agree on one thing: they are generally overhyped.

According to recent data from YCharts, a financial research firm, presidents tend to come and go while the markets march on.

“The S&P 500 has consistently grown in value over the long term, no matter who’s in office,” YCharts writes in its report. “Dating back to John F. Kennedy’s inauguration in 1961, the S&P 500 posted a negative return during only two presidencies: Richard Nixon and George W. Bush.”

Similarly, in a 2024 outlook for TIAA wealth management clients, the firm’s CIO came to a similar conclusion when evaluating a traditional 60% stocks and 40% fixed income portfolio against all presidential elections since 1928. Only four years showed negative results—and they were all driven by major economic events, including the Great Depression (1932), World War II (1940), the bursting of the tech bubble (2000) and the financial crisis (2008), according to TIAA Wealth Management Chief Investment Officer Niladri Mukherjee.

Overall, the firm found, the 60/40 portfolio rode out election cycles with a hearty average annual return of 8.7%.

This November, the market will get a rematch of candidates with economic track records already in place. In some ways, the markets should be able to price in the outcome more quickly.

But, unlike prior presidential elections, this one may have a more long-term impact on the economy and markets, says Anthony Woodside, head of multi-sector fixed income and investment strategy at LGIM America.

“Generally, elections are over-hyped, and the markets move with the fundamental strength of companies, the labor market, and things along those lines,” he says. “But the scope of things this time may be very different.”

Historical Anomaly

LGIM’s thesis that this election may fly “in the face of decades of collective wisdom” is two-fold: First, the market may be underappreciating an election sweep by either party, which if it occurred would give one party more control to pass fiscal legislation. Second, the two presidential candidates on offer would be going into final terms with executive actions that may play greater-than-normal roles in the long-term economy, including tax cuts, tariffs and immigration’s impact on the labor pool.

On the first point, Woodside says, a sweep of the White House and Congress by either party could be significant for the country’s economic future, particularly when it comes to the federal deficit.

“If you get a sweep by either party it’s going to be hard to see the federal deficit coming down in any quick fashion,” Woodside says.

A ballooning federal deficit matters for the markets because the country is operating right now in a strong economy with very few levers to pull should it falter, Woodside says. Those risks could occur with events such as a further fallout of regional banks to issues with commercial real estate.

“We have a very bad starting point if you will from a fiscal perspective,” he says. “If there is any downside surprise to growth or any disorderly fallout to growth, one of our concerns is the amount of fiscal space the government have to support the economy.”

Furthermore, with outsized deficits, it could continue the relatively high inflation rates, which the Fed has been struggling to bring down to its target 2% range.

In terms of immigration, Woodside notes that recent record levels of immigration were arguably a driver of the labor market remaining robust and wage growth staying down. If Trump were to be voted in, there will be more aggressive moves to curb immigration that could affect how the labor market and wages going forward.

Similarly, if Trump is elected, he will likely increase tariffs, particularly on goods from China. Tariffs, in Woodside’s view, generally create an inflationary environment, which could “provide upside risk to inflation and mean that the Fed could be higher [on rates] longer.”

Early Indicators

In a quarterly update, LGIM noted that “pinpointing the precise moment when elections start to matter to markets is a challenge.” However, the “recent rise in long-maturity US Treasuries could be an early indication of election-related fiscal risk.”

Research firm YCharts tracked the markets in the opening days of the Trump and Biden presidencies, noting that the initial reaction ended on an upswing for both candidates.

“The markets greeted the prospects of a Biden presidency in 2020 with more enthusiasm than they did Trump’s electoral victory in 2016,” researchers wrote. “However, the post-election period for both was generally positive for equities, as the S&P 500 was positive during the entire period from Election Day to inauguration day.”

When looking historically, the firm advises long-term investors to wait out any short-term volatility around elections. For example, it considers investing in the S&P 500 only during a Democratic presidency and only a Republican presidency—neither of which beats out investing throughout both types of leadership. Such a strategy historically would result in:

• Investing only during Democratic presidencies since 1950 resulted in a 5.11% annualized return;
• investing exclusively during Republican presidencies generated a 2.80% annualized return; and
• staying the course through both presidencies produced the best result at 8.05% annualized return.

“Basing an investment strategy on a president’s political party is likely hurting a portfolio more than helping it,” the firm wrote. The markets greeted the prospects of a Biden presidency in 2020 with more enthusiasm than Trump’s electoral victory in 2016. However, the post-election period for both was generally positive for equities.

Meanwhile, the firm found, higher average annualized returns have historically come when Congress is divided between parties. All in all, the firm recommends that wealth managers remind investors of the “resilience of a long-term investment approach.”

Correction: Fixes Niladri Mukherjee’s title as CIO of wealth management division.