For the Stock Market, It’s About Policy, Not Politics

Additional content provided by Colby Hesson, Analyst, Research.

As the 2024 U.S. presidential election approaches and Americans prepare to vote, polls show a close race based on various polls in key six swing states (Arizona, Georgia, Michigan, Nevada, Pennsylvania, and Wisconsin). Amid all the attention on President Joe Biden’s debate performance and Donald Trump’s legal challenges, we believe key issues such as the federal deficit, foreign policy, healthcare, immigration, taxes, and trade will ultimately determine the outcome of the election — all big issues on which both parties disagree and that can affect the economy and financial markets. Although abortion is not an economic issue, it may also play a role in the election outcome.

Signals to Watch in the Months Ahead

Stock performance from August through October during presidential election years has been well correlated with election outcomes. Specifically, when the S&P 500 was positive during this three-month stretch, the incumbent president won. This indicator has accurately predicted the last 10 presidential winners and 12 of the past 13 (we wrote about this pattern in Key Market Themes During Election Periods back in May).

Other signals to watch as the election approaches include the so-called misery index, the sum of inflation and unemployment. This measure is currently 7.4%, which signals a marginal advantage for Trump, according to Dan Clifton, Political Strategist at Strategas Research Partners. But inflation is expected to drop between now and November, so this statistic may edge lower even if the unemployment rate ticks up.

Approval ratings are also generally good predictors, so we’ll be watching President Biden’s as Election Day approaches. And we’ll be watching stocks tied to policy differences between the candidates.

Policy, Not Politics, is What Matters

As we noted in Midyear Outlook 2024: Still Waiting for a Turn, for the long-term investor, political opinions are best expressed at the polls and not in portfolios. As highlighted below, if you invested $100,000 in the S&P 500 back in 1950, but only remained invested during years when a Democrat was president, you would have around $3.1 million today (excluding dividends), compared to $1.0 million if you only invested when a Republican was president. While this gap appears wide, it’s nowhere near the $32.6 million you would have made if you bought and held the S&P 500 over the entire time frame, giving credence to the adage of time in the market beats timing the market.

S&P 500 vs. Political Party Portfolios

Source: LPL Research, Bloomberg 06/24/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Policy matters for certain industrials and companies, but corporate America is very adaptable. There will be some winners and some losers depending on what happens in November — for example, bank stocks may perform better under a Trump policy of deregulation. And green energy and infrastructure stocks may do better in a second Biden Administration (or under an alternative Democratic candidate). International equities probably perform better under Biden as he is expected to be less aggressive on de-globalization, while the U.S. dollar may be stronger, and interest rates higher, under Trump.

Note that we touched on winners and losers in our May blog referenced above and will be producing more election content for LPL.com over the next several weeks.

More Evidence Politics Don’t Matter as Much as You Might Think‍‍

Another way to illustrate how politics don’t matter to markets as much as you might think is to examine historical performance under different congressional setups. A Democratic president with a Republican or split Congress has historically generated average returns of near 16%. A Republican president with a split Congress is also good for stocks, with an average return for the S&P 500 of about 14%. Not a big difference there.

The less impressive returns have come during President George W. Bush’s administration (Bush 43), which included two bear markets in 2001–2002 and 2008 and dragged down average performance under Republican presidents with a unified Congress (Dem or GOP).

Even with those two awful bear markets, the average S&P 500 return under those two congressional scenarios is still 6.7% (Democrat Congress/Republican President) and 4.9% (Republican Congress/Republican President). So, if you think this pattern holds, we would argue that holding equities is still justified.

Conclusion

It’s too early to make a prediction on the November elections, but if we had to pick a party now, we would rely on the data to help us, just as LPL Research always does in making investment decisions. The misery index and approval ratings suggest a close election, but with Trump a slight favorite, while we will have to wait for a stock market signal.

In conclusion, we offer three important messages for investors:

1. It’s early and anything can happen.
2. Even if you knew the eventual winner today, your investment plan shouldn’t change unless you are an active sector trader or stock picker.
3. Markets don’t like uncertainty, and we are likely to get more in the next few months than we’ve experienced so far in 2024. So be prepared for more volatility and seek opportunities to potentially buy a stock market dip.

For more of LPL Research’s views on the second half, please read our Midyear Outlook 2024: Still Waiting for a Turn.