As the US prepares for its upcoming elections, both investors and market analysts are closely watching how these political shifts could affect the stock market. Elections have historically played a pivotal role in shaping the performance of indices like the S&P 500 and the broader US economy. In this post, we will dive deep into the relationship between election cycles and stock market volatility, offering insights for investors on how to position their portfolios during such times.
Historical Stock Market Trends During Election Years
One of the first things to understand about elections is how the stock market has historically responded during election years. According to long-term data, the S&P 500 gains an average of 7% during election years since 1952. However, this performance is notably lower than the 17.7% average gain in the year prior to elections, indicating that market volatility tends to increase during the election cycle.
Key Takeaway: Investors should expect more volatility during election years, which can lead to a shift in the market’s overall performance.
Republican vs. Democratic Impact on Stock Performance
Research from Morgan Stanley reveals an interesting dynamic: the S&P 500’s average return when a Republican president is elected stands at 15.3%, compared to 7.6% under a Democratic administration. While this trend favors Republican leadership from an investment return perspective, Democratic policies tend to impose more regulation and taxation, especially on large corporations, which can curb short-term market gains.
Key Takeaway: Investors should weigh potential policy changes when adjusting portfolios, as Republican-led economies typically result in higher stock market returns, while Democrats focus more on corporate regulation and taxation.
Sectoral Winners and Losers During Election Cycles
One of the most notable examples of election-driven market movements occurred when President Biden entered office, promising aggressive support for green energy initiatives. As a result, stocks related to green energy skyrocketed in value. However, those gains were short-lived, as many of these stocks later hit rock-bottom prices.
Similarly, investors should note that increased taxes on corporate share buybacks—a policy Biden has pushed through as part of the Inflation Reduction Act—could have a detrimental effect on the overall market. For instance, companies like Nvidia recently announced a $15 billion share buyback, which could become significantly costlier under such tax policies.
Key Takeaway: Keep a close eye on sectoral shifts. Energy, tech, and manufacturing sectors could experience significant gains or losses depending on the candidate’s policies.
The Risk of a US Recession During Election Years
It’s also crucial to note that 54% of election years have overlapped with officially declared recessions, according to the National Bureau of Economic Research. The combination of an unstable economy, potential changes in policy, and stock market reactions makes it vital for investors to prepare for a possible downturn.
Key Takeaway: Recessions have frequently coincided with election cycles. Investors should consider hedging their portfolios or diversifying into safer assets like long-term treasuries or gold.
How to Adjust Your Investment Strategy During Elections
To navigate the volatility that elections can bring to the stock market, it’s essential for investors to make adjustments to their portfolios. Here are some actionable strategies:
- Diversify with Safe-Haven Assets: Stocks like Coca-Cola or stable commodities like gold offer protection during uncertain times.
- Consider Shorting Volatile Indices: As we’ve done previously, shorting indices like the S&P 500 can be a smart hedge if you expect increased volatility.
- Look at Long-Term Government Treasuries: With interest rates likely to decline post-election, long-term treasuries may become a valuable part of your portfolio.
- Be Patient with High Valuation Stocks: Many high-growth companies may currently be overpriced, leading to potential corrections. Staying cautious and keeping cash on hand could help take advantage of future market dips.
Key Takeaway: Prepare your portfolio for election-related volatility by incorporating safe assets, shorting volatile indices, and considering long-term plays in bonds and undervalued stocks.
Conclusion
Both Republican and Democratic policies have the potential to significantly alter the landscape of the US economy and the stock market. Investors need to stay informed and proactive, as increased volatility and potential recessions during election periods are common. Whether through hedging strategies, diversifying into safer assets, or capitalizing on long-term opportunities, it’s crucial to adjust your portfolio to navigate these uncertain times.