Yahoo Finance What Does an Election Year Mean for Your Investments?
This year is shaping up to be full of economic uncertainty due to a confluence of factors. It’s unclear whether inflation will continue its downward trend — and while the Federal Reserve has indicated it will cut rates three times in 2024, per the Associated Press, the timing is unclear. What’s more, while talks of a 2024 recession featuring a soft landing have been waning, views vary about where the economy is heading, with discussions about a “no landing” economy surfacing.
See: 7 Ways the Upper Middle Class Can Become Rich in 2024
Find: 6 Genius Things All Wealthy People Do With Their Money
This is all happening in an election year, which historically has had several effects on investments and different asset classes — including the stock market, bonds and real estate. And this particular presidential election cycle might bring even more uncertainty, some experts argued.
“The election is likely to be very close, thus potentially contested, which means lots of political uncertainty and volatility in stock and bond markets,” said Moody’s Analytics chief economist Mark Zandi. “So, my investment advice is to buckle in, and not make any big investment decisions while markets are going up, down and all around.”
Sponsored: Owe the IRS $10K or more? Schedule a FREE consultation to see if you qualify for tax relief.
What Sectors Have Historically Performed Well During Election Years?
According to Robert R. Johnson — PhD, CFA, CAIA and professor of finance for the Heider College of Business, Creighton University — simply put, the calendar year in which a presidential election has been held has been a good one for stock returns.
Johnson explained that — looking at data from 1926 through 2023 — the S&P 500 has returned an average of 11.57% in presidential election years, and the return has been positive 20 of the 24 years, representing an 83.33% positive rate.
“The only year that has been consistently better for stocks than the year of a presidential election is the year prior, that is, year three of the presidential election cycle,” he added noting that the year prior to a presidential election has seen an average return of 17.45% with only two negative years out of 25, representing a 92% positive rate.
On the other hand, he said that the year immediately following a presidential election has experienced a lower return, on average, with a return of 9.66%.
“Several explanations for this pattern have been advanced. Some contend that administrations want to ‘get the bad news out early in an administration’ in order to set the party up for re-election,” he said. “That is, presidents are keen on getting the ugly stuff out of the way early in their tenure.”
There is another, bigger factor with respect to stock returns and the presidential election cycle: Federal Reserve monetary policy.
Johnson added that equity investors should be comforted by the expectation that the Fed will adopt an accommodative monetary policy in 2024, as research shows that equity market returns have been higher when the Fed adopts such policy.
Which Sectors Could Be Risky?
Some specific sectors might be trickier to navigate in election years. For instance, technology stocks often take a hit during this timeframe. This was the position illustrated by Peter C. Earle, senior economist with the American Institute for Economic Research.
“That’s probably because a sector composed of firms that have recently begun to surpass $1 trillion in market capitalization is probably vulnerable to antitrust actions,” added Earle.
Healthcare and energy are tricky categories as well, Earle indicated.
“Medical costs, insurance practices, and the price of oil/gasoline are frequently invoked in campaign promises and political wrangling. Stocks in those areas could perform well or abysmally during an election year,” he added.
Other sectors such as foreign investments and emerging markets are extremely sensitive. Trade policy tweaks or tariffs can send shockwaves through companies, stirring up major volatility, said Joe Camberato, CEO and founder of National Business Capital.
“And be very wary of companies shouldering heavy debt — policy shifts could throw a wrench in their debt-servicing plans,” he said.
Which Other Sectors Could Benefit From an Election Year?
Some sectors that could benefit from this environment include stocks in renewable energy, as candidates who champion aggressive climate change policies could positively impact them, including solar and wind power companies, according to Taylor Kovar, CFP, CEO and founder of Kovar Wealth Management.
In addition, he noted that defense stocks might benefit from commitments to military spending, whereas infrastructure companies could gain from investment plans in roads, bridges and utilities.
What Should Investors Pay Attention To?
Camberato likened investing in election years to “navigating through a maze blindfolded.”
“It’s really a ‘wait-and-see’ game during election season, with investors trying to suss out which way the wind is blowing,” he said, noting that this uncertainty can either fuel a market rally or halt it.
“But when there’s uncertainty, there’s opportunity. Just be sure to proceed with caution,” he added.
And caution seems to be the key piece of advice several experts recommend, arguing that attempting to predict market movements based on election outcomes is fraught with risk.
As Kovar noted, a high degree of speculation leads to increased market volatility.
“Investors making large, reactive moves may find themselves on the wrong side of sudden market shifts,” added Kovar, noting that policies take time to implement — and their market impacts are often less immediate or direct than anticipated.
Anticipated Fed Rate Cuts Also a Factor
Beyond being in an election year, several experts — including Vijay Marolia, co-founder of The Cash Square — argued that the “real driver of market prices, such as stocks, bonds and real estate,” will be the Fed’s actions, and the timing of its rate cuts.
This is a sentiment other experts echoed, arguing that markets are generally driven by fundamentals.
In turn, factors such as inflation, the economy, and Federal Reserve policy will likely be bigger drivers of market performance than election cycles, according to Angelo Kourkafas, senior strategist, investment strategy at Edward Jones.
“And we see the fundamentals as favorable in the year ahead, as inflation moderates, the Fed likely shifts to rate cuts, and the economy remains resilient overall,” added Kourkafas. “Rather than making knee-jerk investment decisions based on an election cycle, it’s better to follow time-tested investment principles and avoid letting politics influence your long-term strategy.”
More From GOBankingRates
This article originally appeared on GOBankingRates.com: What Does an Election Year Mean for Your Investments?
