Stocks tend to rally in the year before Election Day, but concerns arise for 2024
Investors can take solace in the fact that stocks have historically rallied in the year leading up to Election Day. However, there are growing concerns about the 2024 U.S. presidential election that may dampen this trend. Saira Malik, the chief investment officer at Nuveen, which manages $1.2 trillion in assets, points out that while the S&P 500 has historically seen an average total return of around 10% in presidential election years, the large-cap benchmark had already experienced a significant rally between early November and the end of last year.
This means that the pre-election gains may have already occurred, raising concerns about the equity market’s performance at the beginning of 2024. Malik also highlights other factors that contribute to the apprehension, such as increased market volatility in election years and investors pricing in more interest rate cuts than the Federal Reserve is likely to deliver. Additionally, stocks are currently trading at a 20% premium to their average valuation since 2010, making them expensive.
Investors are also well aware that the 2024 election is expected to be highly contentious. Former President Donald Trump is currently the front-runner for the Republican nomination, while President Joe Biden faces low approval ratings, even within his own party. The political backdrop is becoming increasingly contentious, and this could lead to higher market volatility as the election draws near. A contested election result could further exacerbate this volatility.
Despite these concerns, historical market performance around presidential elections offers some insights. John Lynch, the chief investment officer at Comerica Wealth Management, highlights that stocks have never posted a yearly decline when an incumbent president ran for re-election, regardless of whether they won or lost. On the other hand, every president who experienced a recession in the two years before their re-election ended up losing. This suggests that the performance of the market reflects the economy and can be indicative of a candidate’s prospects.
Lynch also notes that the stock market has shown a strong predictive power in presidential elections. In 24 elections since 1928, the direction of the S&P 500 in the three months leading up to the election has accurately predicted the outcome, with only four exceptions. If the index was positive during this period, the incumbent or the candidate of the incumbent’s party won. However, there were instances where the index rose, but the incumbent party’s candidate still lost.
Looking at recent market performance, U.S. stocks had a strong rally in 2023, following the typical pattern of solid gains in the third year of a president’s term. While equities consolidated at the beginning of the new year, they finished last week on a strong note, with the S&P 500 and the Dow Jones Industrial Average logging record closes. Tech shares also saw a resurgence, reflecting concerns about the consumer’s staying power.
Given the combination of cyclical risk and politically inspired volatility, Nuveen suggests playing defense in the current market environment. This includes focusing on stocks of dividend growers and global infrastructure plays that stand to benefit from trends favoring reshoring and other changes to supply chains. These types of stocks have historically weathered down markets relatively well.
In conclusion, while stocks have historically rallied in the year before Election Day, concerns are emerging for the 2024 U.S. presidential election. The pre-election gains may have already occurred, and there are worries about market volatility, expensive stock valuations, and a highly contentious political backdrop. However, historical market performance offers some insights into potential outcomes, and investors can consider defensive strategies to navigate these uncertainties.