As Americans head to the polls on Tuesday, markets at home and abroad are sharply focused on the potential impact on the economy. In this investment perspective, we will review historic trends of equity and bond markets before and after an election, discuss potential ramifications, and offer insights on how to structure long-term portfolios in the face of political uncertainty.
Unsurprisingly, neither presidential candidate is promising fiscal discipline, and the promises made by each candidate along the campaign trail would most assuredly result in higher deficits. Whether these deficits come from spending initiatives or tax cuts remains to be seen. Regardless, a candidate’s ability to turn promise into policy largely depends on congressional control.
If one party gains control over both the executive branch and Congress, the administration is more likely to pass its proposed policies, potentially resulting in higher-than-usual deficits. Although a supermajority is typically needed to pass legislation, both parties have used the budget reconciliation process—requiring only a simple majority—to pass legislation such as the Affordable Care Act under President Obama or tax cuts under President Trump.
In contrast, a divided Congress generally limits the ability of the administration to enact policy, creating an environment of gridlock, where markets operate under the assumption that current policies will remain in place. However, market activity leading up to the election show some interesting dynamics.
Historically, equity markets have tended to show negative returns in October during presidential election years. November following an election has traditionally been a positive month, presumably due to the lifting of uncertainty.
In non-election years, S&P 500 performance has remained consistent, delivering returns of 1.9% and 2.0% in October and November, respectively.
The broad bond market followed a similar pattern as equity markets between 1976 and 2020, with slightly stronger returns in November than October.
This pattern is even more pronounced for long-term Treasuries, which historically have shown much larger gains in November than October during election years.
Now that October 2024 is behind us, did history repeat? The S&P 500 fell 0.9% for the month, which is roughly in line with historical observations.
Bonds yields have risen, leading to a 2.5% decline in the Bloomberg U.S. Aggregate Index, a 1.6% fall in intermediate-term Treasuries, and a sharp 5.1% decline in long-term Treasuries.
Capital market returns are shaped not only by policy goals and governmental control but also by the economic conditions in the lead-up to elections. A combination of a growing consensus that a soft-landing has been achieved along with a “Trump trade” influence led to a bond market sell-off.
As the polls start to close and results begin to come in, several questions remain:
The potential for steep tariffs is notable, as Trump has proposed measures far broader and more substantial than those from his previous term. This action could proceed independently of Congress.
We may not have the answers on election night or even in the days following the election. As a result, markets could be somewhat volatile until clarity emerges.
Elections have ramifications for the investment landscape, but trying to adjust portfolios based on anticipated political outcomes is as challenging—and often counterproductive—as timing the market. The risk of being wrong generally outweighs the potential gains of being right.
Depending on the outcome, there could be divergence across global equity markets, heightened currency and rate volatility, and a shift in monetary policy. While all central banks except Japan are easing policies, a trade-induced economic slowdown combined with higher inflation could pose new challenges.
The market currently believes that the Fed will cut rates twice more in 2024 and up to four times in 2025 – with the cuts possibly front-loaded earlier in the year; this could prove to be either too optimistic, or not optimistic enough.
We continue to believe a well-diversified portfolio that balances risk and hedging assets tailored to your unique needs creates the greatest potential for long-term success. The election noise will soon pass and its impact on capital markets will eventually become a blip on the radar.
As we move forward as a country, our hope is for a renewed period of economic prosperity and a mending of the social fabric in a time of division. We look forward to working with each of you in support of your long-term goals. ⬛
To request a full copy of this or any of our research reports, please complete all fields in the form and click submit.