How Will the Election Impact Your Investments in 2024?

As the 2024 election approaches, investors are wondering how will the election impact their investments. Elections often bring uncertainty to financial markets, influencing stock prices, interest rates, and economic policies. Understanding these potential effects is crucial for investors to make informed decisions and navigate the evolving financial landscape.

This article explores the historical performance of markets during election years and identifies key economic factors to watch. It examines potential policy shifts and their market implications, offering investment strategies to handle election year uncertainty. By analyzing these aspects, investors can better prepare their portfolios for the various outcomes that may result from the upcoming election.

Historical Market Performance in Election Years

Past election year returns

The stock market's performance during election years has been a subject of interest for investors. From 1928 to 2016, the average return for the S&P 500 in presidential election years was 11.3%. This trend has continued in recent years, with a 2024 analysis by T. Rowe Price calculating an average S&P 500 return of 11% for the 24 presidential election years between 1928 and 2023.

Interestingly, the market has demonstrated a tendency to rise regardless of which party takes the presidency. Since 1933, the overall market trend has been upward through eight Democrat and eight Republican presidencies. This suggests that the question "will the election impact your investments" may not be as straightforward as some might think.

Debunking election year myths

Several myths surround stock market performance during election years. One common misconception is that stocks don't perform well in these periods. In reality, returns in election and non-election years are usually not significantly different.

Another myth is that markets will crash if a particular candidate wins. However, historical data shows that booms and busts have occurred under administrations from both sides of the aisle. The economic backdrop tends to have a more significant impact on market performance than the election itself.

Long-term market trends

When considering how the election will affect the stock market, it's essential to look beyond short-term fluctuations. The long-term trend of the market has been consistently upward, regardless of election outcomes. This underscores the importance of maintaining a long-term investment strategy rather than making drastic changes based solely on election results.

Key Economic Factors to Watch

Fiscal policy changes

As the election approaches, investors should pay close attention to potential fiscal policy changes that could have an impact on their investments. The outcome of the election may lead to shifts in government spending and taxation, which are the key levers of fiscal policy. These changes can have a significant influence on economic conditions and, consequently, investment markets.

Monetary policy outlook

The Federal Reserve's monetary policy decisions will continue to play a crucial role in shaping the investment landscape. Investors should monitor the Fed's stance on interest rates and inflation, as these factors can have a substantial effect on various asset classes. The election outcome may indirectly influence the Fed's decisions, particularly if it results in significant changes to fiscal policy or economic uncertainty.

Sector-specific impacts

Different sectors of the economy may be affected differently depending on the election results. For instance, a Republican victory might lead to increased support for fossil fuel development, while a Democratic win could further promote renewable energy initiatives. However, it's important to note that policy tendencies don't always translate directly into investment outcomes. Historically, market returns have been more dependent on economic and inflation trends rather than election results alone.

Investors should remain focused on factors such as economic growth, interest rates, inflation, and corporate earnings when making investment decisions. While the election will undoubtedly generate headlines, it's crucial to maintain a long-term perspective and avoid making drastic changes to your investment strategy based solely on election outcomes.

Potential Policy Shifts and Market Implications

Tax policy changes

The upcoming election has the potential to have an impact on your investments through shifts in tax policy. The Tax Cut & Jobs Act (TCJA) provisions are set to expire at the end of 2025, creating uncertainty about future tax rates. If extended, lower tax rates could persist, but this might lead to concerns about the federal budget deficit. On the other hand, if the TCJA provisions are not extended, tax rates could increase for up to 60% of tax filers. This change would affect standard deductions, child tax credits, and estate and gift tax exemptions. For corporations, the top tax rate could potentially rise from 21% to 35%. These changes in tax policy could influence investment decisions and market performance.

Government spending priorities

Government spending priorities can shift significantly based on election outcomes, potentially impacting various sectors of the economy. Key areas to watch include energy, infrastructure, and defense spending. Additionally, the future of programs such as Social Security, Medicare, and Medicaid could be influenced by the election results. These shifts in spending priorities can have ripple effects throughout the economy, affecting different industries and potentially influencing investment decisions. As investors consider how the election will affect the stock market, it's crucial to monitor these potential policy changes and their implications for various sectors.

Investment Strategies for Election Year Uncertainty

Diversification tactics

To navigate the uncertainty surrounding how the election will affect the stock market, diversification remains a crucial strategy. Spreading investments across various asset classes can help mitigate risk and potentially smooth out volatility. Consider a mix of large-cap, mid-cap, and small-cap stocks, along with government and corporate bonds for stability. Real estate investments and commodities like gold can provide additional hedges against market fluctuations. Private credit offers excellent risk-adjusted returns in the current environment, further enhancing portfolio diversification.

Focusing on fundamentals

While election-related news may dominate headlines, it's essential to maintain focus on fundamental factors that drive long-term market performance. These include economic growth, interest rates, inflation, and corporate earnings. Historically, these factors have had a more significant impact on investment outcomes than election results alone. By prioritizing fundamentals, investors can make more informed decisions and avoid being swayed by short-term political noise.

Long-term perspective

Maintaining a long-term perspective is crucial when considering how the election will impact your investments. Historical data shows that markets have demonstrated resilience over time, regardless of which party controls the White House. Instead of trying to time the market based on election outcomes, investors should stay focused on their financial goals and stick to a disciplined investment strategy. This approach can help weather short-term volatility and potentially benefit from the market's long-term upward trajectory.

Conclusion

As we've explored, the upcoming election's influence on investments is multifaceted. While historical trends suggest resilience in the markets regardless of election outcomes, it's crucial to stay informed about potential policy shifts and their market implications. Diversification, focusing on fundamentals, and maintaining a long-term perspective remain key strategies to navigate election year uncertainty.

Ultimately, a balanced approach to investing, rooted in sound financial principles, is likely to serve investors well through election cycles and beyond. By staying attuned to economic indicators and adapting strategies as needed, investors can position themselves to weather short-term volatility and potentially benefit from long-term market growth. For additional information to consider your specific financial situation, call to schedule an appointment with one of our financial advisors.

Opinions expressed in the attached article are those of the author/speaker and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The stock indexes mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.