Presidential Election Year: How Will It Impact the 2024 US Stock Market?

With the 2024 US presidential election heating up, many investors are wondering what potential impact it could have on the stock market this year. While elections can sometimes spark volatility and uncertainties, history suggests the overall effect on long-term market performance tends to be muted.

However, the stock market forecast for 2024 has some unique economic and political dynamics to watch closely.

The Stakes This Year

The latest polls indicate a likely rematch between incumbent President Joe Biden and former President Donald Trump as the nominees. Emotions and political divisions are running high with such a polarizing potential matchup. Markets generally prefer certainty and clarity, which a close, hotly-contested election may not provide.

On top of that, investors will be closely watching the down-ballot races for control of Congress. If one party sweeps the presidency and both houses of Congress, it could open the door for more aggressive policy changes on taxes, spending, healthcare, energy, and more. A divided government would likely mean more gridlock.

What History Tells Us?

Looking back at data since the 1930s, the S&P 500 has averaged positive returns of around 7.5% in presidential election years. However, the path is often bumpier than normal, with heightened volatility in the months leading up to the election.

Perhaps more surprising is that stock performance has been consistently positive regardless of which party wins the White House. Analysts at investment bank Strategas found the market has done well under all partisan scenarios going back over 90 years – with Democratic presidents, Republican presidents, and in times of united or divided government.

The economy tends to be a far bigger driver of market returns than election results. But in presidential election years, there is one clear pattern – sitting presidents seeking re-election have historically seen very strong market performance as they look to bolster economic conditions.

Since World War 2, the S&P 500 has gained ground every single time during years when the incumbent president ran for a second term, averaging a total return of 15.5%. Strong economic growth and bullish investor sentiment fuel those rallies as incumbents pull out all the stops on fiscal stimulus.

2024 Cross-Currents

While the historical tendencies provide a useful framework for the stock market forecast for 2024, it also brings some unique crosscurrents that could shake up the normal patterns:

• An Ongoing Inflation Battle: Inflation remains stubbornly high, and the Federal Reserve has continued to raise interest rates aggressively to tame rising prices. Fed rate hike cycles have historically weighed on financial markets as tighter monetary policy slows economic growth. However, the prospect of forthcoming rate cuts sometime in 2024 currently provides a tailwind for stocks.
• Economic Uncertainty: The path for economic growth is murky, with leading forecasts ranging from a “soft landing” of continued slow growth to a potential recession. Whoever wins the White House will face pressure to support growth through fiscal policy measures like spending bills or tax changes.
• Emerging AI Revolution: The explosive emergence of artificial intelligence and generative AI tools like ChatGPT captures imaginations and investment dollars as a potentially transformative new technology on par with the internet or mobile computing. However, the regulatory path remains extremely uncertain, which could hinge on the 2024 election outcome.
• Frothy Valuations?: After a strong rally to end 2023, some analysts are raising concerns about the stock market getting ahead of itself on lofty valuation multiples and unrealistic expectations for 2024 earnings growth. Any downside surprises on the profit front could spark selloffs, particularly in the pricey tech sector fueling the market’s gains.

Investment Strategies for an Election Year

With stocks historically rising under Democratic and Republican administrations, most long-term investors are best served by staying the course through the election volatility, absent a drastic change in their financial circumstances or goals. Here are some key stock trading strategies for navigating this election year:

• Maintain a well-diversified portfolio across sectors, asset classes, etc. Diversification can help smooth out volatility from policy impacts that disproportionately affect certain industries.
• Avoid making drastic positioning changes based solely on election predictions or outcomes. Markets are efficient and have historically priced in new policies and administrations rapidly.
• Be prepared to take advantage of volatility by putting cash to work through dollar-cost averaging or rebalancing opportunities if markets become dislocated around election events.
• In managing your portfolio, pay closer attention to economic fundamentals like Fed policy, inflation, employment, and corporate earnings over election rhetoric.

The Bottom Line

History tells investors not to get too caught up in the theater and pomp surrounding presidential elections when it comes to charting the stock market’s path. While the outcome certainly has policy implications, thieves and fundamental drivers like economic growth, interest rates, and corporate profits tend to be far more consequential for investors over the long run.

That said, the highly polarized US political environment and high stakes of the 2024 race add an extra layer of complexity and uncertainty to this year’s stock market outlook. The partisan sniping and poll-watching frenzy could become an unwelcome distraction as we get closer to November.

Disciplined investors could tune out the election noise and stick to their long-term financial plans. While policy changes can sometimes impact specific sectors or industries more significantly, major fiscal and economic policy shifts tend to get priced into markets relatively efficiently, no matter who occupies the Oval Office.

So enjoy the political theatre if you must. However, for long-term investors, making portfolio decisions based solely on the election horse race is unlikely to be a fruitful strategy. Maintaining a properly diversified portfolio that matches your individual goals, risk tolerance, and time horizon should be the top priority.