Introduction
In this paper we examine the current state of the 2024 U.S. election and how it might impact financial markets this year and beyond. We caution that market timing, especially as it relates to politics, is almost always a losing proposition for investors. The surest way to meet long-term financial objectives is to build strategic, diversified portfolios that can withstand changes in political or market landscapes, which are rarely predictable in advance. Disciplined rebalancing is a tool that keeps us honest and points the compass needle toward those goals. This approach helps remove emotions from decision-making, limiting some of the errors that can drive intelligent investors off-target. Markets are prone to cyclical overreactions and dislocations, but with a few exceptions, these tend to be times where it’s helpful to reevaluate and reaffirm strategic positioning—which itself should have provided some measure of protection.
This is not to say that investors and advisors should ignore political and economic crosscurrents. Staying informed is our duty as citizens and no asset allocation approach can safely ignore the political backdrop. Taxes, regulations, trade policy, and even wars are subject to our democratic process, and have deep reverberations across portfolios. They ought to determine investors’ portfolio strategy. We must keep in perspective, however, a certain humility—that accurately trading around the direction, size, and timing of policy changes is almost impossible for all but the very few. This piece will address how we strive for a balance of informed analysis and patient, long-run orientation in a hyper-polarized political environment around the 2024 elections.
The first consideration is that the impact elections have on markets is only partly a function of what policies the winner favors, and whether they are Democrat or Republican. Their first-order impact is equally determined, as with all financial market activity, by expectations versus reality.
Markets are fast-moving, fairly sophisticated, odds-making machines. How much has been priced in already? Second, in the sequence of the election-markets feedback cycle (though not second in importance) is the question, “What can actually get done?” Electoral platforms are one thing; real concrete policy in an often-divided federal system is quite another.
Presidents are relatively weak without party control of both houses of Congress, and this is to say nothing of the courts, the Federal Reserve system, state legislatures, or governors’ houses. Of course, control of these bodies is typically co-determined with control of the White House, so it would be wrong to write off the presidential race as solely symbolic. But other policy-making institutions are elected on different timetables and respond to different sets of issues, while presidential races command the lion’s share of media and financial market attention. In this respect, at least over a full term or full market cycle, it is fair to say that presidential elections are overrated.
Historically, the markets tend to react to which candidate or party espouses a relatively heavier or lighter touch on regulation and on taxation. However, any market movements ahead of the actual election also tend to reverse quickly after the election as lofty campaign rhetoric meets the frictions embedded in the checks and balances consciously imposed by the Constitution.
Research Affiliates, an investment advisor, found that close elections have a more pronounced impact on financial markets than landslides. Investors, like voters, often see “their side” losing as a disaster and seek to limit portfolio risk in the run-up to the election. Once the election is over and the uncertainly goes away, those on the winning side are relieved by the outcome and add risk. Those on the losing side will be despondent, but having already de-risked, will have less remaining to sell. Hence a positive catalyst, “sell the rumor, buy the news” dynamic often emerges from close elections—regardless of outcome. Both sides sell in the weeks before the election and one side buys post-election.
Specifically, in tighter-margin races, the stock market often rebounds in the week before voters head to the polls as the range of outcomes narrows and uncertainty recedes. Stocks tend to swing higher in the days after the ballots are cast and the contest is decided, regardless of the winner’s politics. Data going back to 1924 show that the market tends to rebound by about 2.5% 30 days after a close election, compared to a 1% rebound on average and less than 1% in landslide elections.[1]
This is all to say that the anxiety produced during close election cycles is felt not just by voters, pollsters, and campaign staff, but equally by investors in risk markets. Once the periodic drama is behind us, however, the longer-term position reestablishes itself. Even in an always-on, terminally outraged daily cable news cycle, markets crave and are relieved by the relative calm of business-as-usual.
In contrast to the divergence between close elections and competitive races, Democratic and Republican victories lead to near-identical outcomes in the 30 trading days after an election. As evidenced in the chart below, markets have delivered outsized gains when Republicans win the Presidency and control of the House and Senate. However, this has only happened 10% of the time since 1928, so the sample size is too small to be statistically significant.
While investors are trained to regard with skepticism any claim about financial markets that “this time is different,” political commentators may justifiably worry that the stakes of the 2024 election, regarding wars, taxes, tariffs, rule-of-law, and even institutions themselves might be different. Certainly, the political waves sweeping over both major parties since 2020 (and indeed since Trump first won in 2016) appear to prefigure a major reconfiguration of political axes and policy platforms compared to recent history. Maybe this time really is different, and history is less trustworthy as a guide. Perhaps. That said, every major election introduces major turning points in both global and national politics, from the Great Society to the Vietnam War to the fall of the Berlin Wall, to the 2008 Global Financial Crisis. Each election is fought and decided on terms distinctly different than most previous ones yet regular patterns—at least with respect to financial market reactions—do emerge.
Presidential Elections and the Impact on the Stock Market
Presidential elections do impact the stock market. But not usually in the way immediately envisaged by strategists. How much do they actually matter, and what can we infer from past elections?
Source: JP Morgan Asset Management
For this analysis, we examined the period from 1928 through 2023, and focused on the S&P 500 Index. This period encompasses 24 presidential elections. For the entire period, the annual average total return for the S&P 500 Index was 12.2%. During election years, the S&P 500 only averaged a return of 11.6%, while during off-election cycles, the annual average return was 12.5%. This underperformance during presidential election years is not surprising. Elections heighten uncertainty, which markets dislike, yet the differences are small and variable, so would not reward a strategy of avoiding election years.
What if we break it down even further and look at election results?
With a presidential election, there are really two possible outcomes (for our purposes at least): The presidency can stay with the incumbent party, or the new president can be from the opposition party. This presents a much more interesting story than the election-year vs. off-year binary. During election years where the presidency stayed in the same party (either the president was reelected, or the new president was from the same party), the S&P 500 averaged an annual return of 16.00%, but when the presidency switched parties, the annual average return was only 6.35%. So, what happened here?
It’s easy to tell a story about how the markets like continuity, and change is scary. But we surmise that the causation runs the other way, assuming there is any meaningful causation at all. It would seem more likely that the presidency switched parties because the economy wasn’t particularly strong, rather than the presidential campaign driving the market. While we’ve already stipulated that presidents don’t have as much power over the economy as many people think they do, that doesn’t really matter in an election. If the voters think you have control over the economy, they will vote accordingly. In other words, what’s going on in the markets will tell you about the election, rather than the other way around.
Next, we compared S&P 500 returns in the year of a presidential election versus the returns in the year after the election. An interesting contrast appears. In presidential election years, when a Republican is elected, the S&P 500 rose 15.3% on average compared to 8.5% when a Democrat was elected. However, in the year after a Presidential election, the S&P 500 rose 17.4% when a Democrat was elected compared to 2.7% when a Republican was elected. We caution not to read too much into these figures due to the small sample size and the fact that other exogenous events likely influenced some of the most extreme years during the Great Depression in the 1930s, the Global Financial Crisis of 2008-2009, and COVID in 2020.
A study from ETF provider First Trust tabulates these results over 24 presidential elections. The data are fascinating to ponder and provide talking points for spin doctors on either side. We find nothing that provides us a deterministic link between political party and short- to medium-run stock market performance, even if we had an accurate forecast of the outcome.
Source: First Trust Portfolios, WMS calculations
Current State of the 2024 Presidential Race
Over the past several months, we have witnessed several plot twists in the 2024 election. President Joe Biden’s debate performance in Atlanta on June 27th set off alarm bells within the Democratic party which ultimately led to him forgoing his party’s nomination. In a statement on July 21st, Biden formally announced that he was stepping aside and quickly endorsed Vice President Kamala Harris for the Democratic nomination. Nothing like this has happened since Lyndon B. Johnson decided against running for reelection in 1968. Even then, LBJ made the announcement in March, not July. In between June 27th and July 21st, former President Donald Trump survived an assassination attempt during an outdoor rally in Butler, Pennsylvania, picked a VP candidate in J.D. Vance, and unified the GOP during its convention in Milwaukee. Robert F. Kennedy Jr. formally announced he was withdrawing from the race and endorsed former President Trump. More recently, a second apparent assassination attempt on former President Trump was thwarted by the Secret Service.
Since Biden’s decision to not run, the 2024 race for President has tightened, both in new polling data and online betting markets. Prior to Biden stepping aside, Donald Trump had a 3-point lead in national polls over Biden and was ahead in all key swing states – Arizona, Georgia, Michigan, Nevada, Pennsylvania and Wisconsin. Trump was also gaining momentum in several reliably blue states – Maine, Minnesota, New Hampshire, New Mexico and Virginia. Currently, Trump trails Harris by 1.8 points nationally, a swing of about 5 points compared to his polling average over Biden. Harris has an 0.1 % advantage in the top battleground states.
Online betting markets currently favor Harris over Trump 52-47%. We caution that the betting markets are thinly traded and quite volatile. For example, prior to Biden exiting the race, Trump’s odds peaked around 66% immediately after the first assassination attempt. After falling behind Harris around the Democratic National Convention in late August, Trump’s odds briefly jumped above 50%. However, subsequent to the two candidates’ September debate, Harris has regained the lead in the betting markets.
The Importance of Pennsylvania
From our perspective, Pennsylvania is the critical battleground state in the upcoming presidential race. According to statistician Nate Silver, Pennsylvania has a 35% chance of tipping the electoral college. Importantly, the odds of securing the needed 270 electoral votes decrease significantly for either candidate if they fail to win Pennsylvania. Trump currently has an 0.2% advantage over Harris in recent aggregated polling data in Pennsylvania.
In the case of voter registration, from formerly staunch Democratic regions to suburban Philadelphia, Republicans have added more than 103,000 new voters since January. As a result, Democrats have a 169,000 voter-registration majority compared to the advantage of 559,000 they enjoyed in 2020. Since 1948, no Democratic presidential candidate has secured the White House without winning Pennsylvania. Overall, the state has favored 10 of the past 12 election winners. The stakes for Harris in Pennsylvania couldn’t be higher.
Current Map & No Toss-up States
The current electoral map from RealClearPolitics gives Harris a slight edge, 221-219 with 98 votes as toss-ups. Without toss-ups, Trump is on track to win 281 electoral votes compared to 257 for Harris according to RealClearPolitics (RCP). Below is a map from Real Clear Polling, an online polling aggregator, which provides a handy framework to visualize candidates’ different paths to victory.
Given that Trump is currently slightly ahead of Harris in the no toss-up scenario 281-257, we thought it would be helpful to outline the different paths for Harris to overtake Trump and get to 270 electoral votes, the required threshold to win the 2024 Presidential election. For those with less interest in handicapping the race as it stands in mid-September, we invite you to skip ahead to the legislative races and our summary wrap-up.
Blue Wall Path
Harris would need to sweep the three upper Midwest industrial states of Michigan, Pennsylvania and Wisconsin. Assuming Trump’s lead in Arizona, Georgia and North Carolina holds, a sweep of the three “Blue Wall” states would give Harris 270 electoral votes vs. 268 for Trump. In this scenario, Harris does not need to carry Nevada, where she is slightly ahead.
Electoral college scenario maps source: https://www.270towin.com
Sunbelt Path
This path was increasingly unlikely for Biden but is more a viable path for Harris. It entails Harris winning Arizona, Georgia, Nevada and North Carolina, but losing the three Blue Wall states. If achieved, Harris would garner 275 electoral votes compared to 263 for Trump. In this scenario, where Trump sweeps the “Blue Wall” states, Harris could not lose even Nevada’s six electoral votes. Harris’ campaign evidently recognizes both the need to play “defense” in traditional Democratic states, as well as to go on the offensive in pursuing advantage through the electoral realignment that has followed demographic shifts of younger, higher-income workers to dynamic population centers in the South.
Alternative Paths for Harris
Harris could reach the required 270 electoral votes by winning Arizona, Pennsylvania, and either Georgia or North Carolina. Relative to Biden, Harris is polling stronger against Trump with younger voters and minority voters, which could benefit her in both Arizona and Georgia. With AZ, PA, and GA or NC Harris would win 272 electoral votes compared to 266 for Trump.
The below map illustrates the importance of Georgia and Pennsylvania for Trump. If Trump carries all of the states he won in 2020 plus Georgia and Pennsylvania, he reaches 270 electoral votes.
Path to 269 (Tie)
Here is an intriguing scenario that could lay the seeds for substantial market volatility ahead. Two plausible maps below show outcomes where neither candidate reaches 270 electoral votes. In the case of a tie (269-269), the House of Representatives determines the next president and the Senate determines the vice president. Under either scenario, it is possible that the President and Vice President are from different parties. In the entire history of U.S. presidential elections, there are only two times where there was no winner in the electoral college and the election was decided by the House of Representatives: Thomas Jefferson (1801) over Aaron Burr and John Quincy Adams (1825) over Andrew Jackson. The Senate has only chosen the Vice President once, in 1837.
A Quick Look at the Senate and House of Representatives
As we wrote earlier, the presidency can turn out to be a bit of a paper tiger without alignment of both houses of Congress to push through legislation. Midterm elections often serve up reversal to parties victorious in the previous presidential race, so the need for Trump or Harris to make headway in Congress is high if they hope for a two-year push on their respective legislative agendas.
Similarly to the Presidential race, both the Senate and House of Representatives races are close. The GOP is currently a slight favorite to win the Senate 51-49 with both West Virgina and Montana flipping from Democrats to GOP. Long-time Senator Joe Manchin of West Virginia decided not to seek reelection and that essentially means that the GOP is heavily favored to win the state. In Montana, challenger Tim Sheehy is about five points ahead in aggregate polling data over incumbent Jon Tester. The Democrats have leads in the five other toss-up races for the Senate – Arizona, Michigan, Ohio, Pennsylvania, and Wisconsin. Each of these five states are also battleground states for the Presidential election, so we expect high turnout for these elections. In Maryland, the Democratic candidate, Angela Alsobrooks, is polling ahead of popular former governor Larry Hogan, but we wouldn’t discount a sleeper surprise here as Hogan looks to distance himself from the top of his party’s ticket.
In the battle for the House of Representatives, the GOP currently has 207 seats rated safe or likely versus 196 seats for the Democrats. RCP has 32 House seats rated as toss-ups. For control of the House of Representatives, 218 of 435 total seats are need for control. So, the GOP needs to win 11 of the 32 toss-up races, whereas the Democrats need to win 22 of the 32 toss-up races for control of the House of Representatives. The GOP regained control of the House of Representatives in 2022 by a slim margin and has controlled the House in five of the last six election cycles and eleven of the last fourteen election cycles dating back to 1995. Prior to 1995, the Democrats controlled the House from 1955-1995, a span of forty years. Whoever controls the House in 2024 will have to hit the campaign trail in two years while controlling restive caucuses on the fringes of their party’s ideological spectrum. Neither party is likely to achieve the overwhelming control seen by the Democrats during last century. Political “mandates” are much spoken of by presidents selectively counting popular or electoral votes. But they rest on tiny margins in the House of Representatives, an increasingly turbulent body where consensus policymaking is rare and substanceless grandstanding is encouraged.
Conclusions: Too Close to Call, and Too Divided to Matter (To Markets)
Political debates around the WMS Investment Committee table are lively and ongoing. We are, largely, consumers of political news and are as nervous as most investors about the problems our country faces.
That said, the United States has been blessed by an incredible, renewable spirit of entrepreneurship and business dynamism. It has the deepest, best functioning, and most attractive markets for raising capital in the world. Government debt, inflation, and policy dysfunction have caused many to doubt U.S. economy’s supremacy over the next century; no doubt, there are clear areas where both sides can contribute to a healthier and more sustainable solution. Immigration, taxes, deficits, healthcare and entitlement reform all share a substantial non-partisan middle ground that remains to be forged by courageous policymakers, but we have come through difficult times before and success of our markets has matched or exceeded those of any of our rivals. When Trump won in 2016, certain media figures predicted a collapse of the global economy. Markets went up. When Biden won in 2020 amid the coronavirus pandemic, and subsequently watched inflation rise to levels unseen in America since the early 1980s, some predicted the destruction of living standards and market malaise. Today stock markets are near record highs and GDP is up in nominal and real terms.
Unfortunately, mass media and a hysterical social media environment for political discourse have enflamed passions and somewhat distracted from our country’s urgent business, domestically and abroad. Financial markets are not immune and thus neither are our portfolios. Nevertheless, we believe history demonstrates that when the febrile electoral moment passes, our country, our world-leading companies, and our heartland of still-thriving small businesses, are very good at getting back to business. Taxes and regulations will likely change, and many will decry the lack of sanity in Washington. Portfolios may require adjustment, but it would be a mistake to buy into alarming and catastrophic rhetoric designed to generate clicks and social media engagement and thereby lose focus on the long-term objectives in an investment portfolio.
[1] Research Affiliates also reviewed the Fama-French size and value factors heading into Election Day and the weekly rebound afterward. Before the election, there is no discernible difference in small cap versus large cap returns. Following a close election, small cap stocks have historically outperformed large cap stocks by about 2.5% over the next 30 trading days, a delta similar in magnitude of the overall market rally. This compares favorably to small caps’ 1% average outperformance. Little difference was found in landslide elections. The value factor displays similar attributes in a close election, outperforming the growth factor by a little over 3.5% over the next 30 trading days post-election. This compares favorably to an average outperformance of less than 1% and a 1% underperformance in landslide elections.