Elections & Markets
With tonight being the first and only debate between presidential candidates, Donald Trump and Kamala Harris, we thought it would be apropos to provide some information and maybe reminders about how elections have historically impacted investment markets. Here is a run-down of what we think is most important to remember:
- Markets tend to get a little spooked leading up to Halloween during election years
The VIX, or Volatility Index, measures market expectations of near-term volatility based on S&P 500 index options, often referred to as the "fear gauge" of the stock market. As you can see from the chart below investor anxiety has generally risen leading up to Election Day in the last eight cycles. However, volatility often cools down once the election is over and in the roughly two-month period leading up to Inauguration Day.
- Pre-election volatility is higher when the incumbent loses
Markets tend to decline in the months leading up to the election when the incumbent loses. This is a classic chicken and the egg argument. Does the incumbent lose because voters go to the polls angry because their accounts are down at election time or is it the reaction to the uncertainty of a changing regime? Nevertheless, in this election we know that we will have new administration in the White House regardless of the outcome.
- Markets tend to perform the best under a divided government
Historically, higher average annualized returns have occurred during a divided Congress, where one party controls the House or Senate and the other party holds a majority in the second chamber. Under a divided government companies and investors can typically count on the status quo to prevail as major unexpected changes are limited.
Lower returns have come during Democratic majorities in both the House and Senate, while higher returns have taken place under Republican control of both congressional chambers. In any case, the market has historically been positive under all six government compositions. Luckily, for investors polling currently points to a strong possibility of a split Congress.
- You are best served to keep your political emotions out of your investment strategy
The most important reminder for investors is that US stocks, measured by the S&P 500 here, have consistently grown in value over the long term, no matter who's in office. Dating back to John F. Kennedy's inauguration in 1961, the S&P 500 posted a negative return during only two presidencies: Richard Nixon and George W. Bush.
- The economy is what matters
The state of the economy leading up to and following the election is what has historically mattered most to the markets. Period so rising economic growth (GDP) and low inflation of yield the highest returns while periods of a declining GDP and high inflation have generated the worst outcomes for investors. See Nixon (high inflation) and GW (financial crisis) for evidence of this.
- Pay attention to tax proposals
When planning for clients, what we are most interested in the candidate’s proposals for tax reform – which you can follow here. Whoever is in the White House and in Congress in 2025 will have to work together to either pass legislation to keep the 2017 TCJA tax cuts from expiring “sunset” or pass a new tax package. A failure to agree on the either will result in a reversion to the pre-2017 tax rates which would be a tax increase for most Americans.
Further, what is concerning to us, based on what has been released thus far is that both candidates' proposals are projected to add to the national debt which will have a meaningful impact on both stock and bond investors in the future.