Election Anxiety? Could Bonds Calm Your Fears?

Lawrence Gillum | Chief Fixed Income Strategist

Last Updated: July 18, 2024

With election season in full swing, investors may be concerned about how either a second Joe Biden or a second Donald Trump presidential term would impact their portfolios. However, as we said in Midyear Outlook 2024: Still Waiting for the Turn, for the long-term investor, political opinions are best expressed at the polls and not in portfolios. Investors, we noted, are better served by staying invested in markets regardless of which party claims the presidential office. That doesn’t mean there won’t be volatility; there likely will be, especially as the rhetoric increases going into Election Day. Historically, that increased rhetoric has translated into increased policy uncertainty.

A recent research report from Guggenheim Investments examined the performance of various markets under varying economic policy uncertainty regimes. Per their work, since 1985, during U.S. presidential election years, the U.S. Economic Policy Uncertainty Index, which measures uncertainty related to economic policy based on media coverage, has averaged 17% higher relative to non-election periods. And the degree to which policy uncertainty prevails has had a meaningful impact on asset returns. The higher the economic policy uncertainty, the better high-quality assets have performed. And as parties finalize their presidential nominees, we could be about to enter that period.

High-Quality Bonds Have Outperformed When Policy Uncertainty is High

Economic Policy Uncertainty and Asset Returns (Since 1985)

Source: LPL Research, Guggenheim Investments 07/18/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Of course, past performance is no guarantee of future returns. So, what could cause past performance from repeating this time around? I think it’s safe to say that neither party can claim fiscal responsibility at this point. So, with budget deficits expected to stay elevated over the next decade (per the Congressional Budget Office), Treasury security issuance will need to stay elevated to fill those deficits. Increased issuance could lead to the need for rates to stay elevated to attract demand. That said, economic conditions and the Federal Reserve’s (Fed) rate-cutting plans are more important to the overall trajectory of interest rates. And with the Fed expected to cut rates later this year, and with the potential for economic policy uncertainty to increase, we could have (marginally) lower rates throughout the rest of the year. As such, investors should consider increasing allocations to strategies invested in higher-quality fixed income particularly those investors with excess cash.

Important Disclosures

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

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Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor's holdings.

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Lawrence Gillum

Lawrence Gillum, CFA, guides the fixed income view for LPL Financial Research and has over 20 years of investing experience.