Due to the unique circumstances in the United States and worldwide, 2024 is an unprecedented year for elections. Globally, nearly 41% of the world’s population will head to the polls this year—more than 3.2 billion people. With the voters of 40 nations making decisions that will have ramifications for years to come, many investors are eager to understand the relationship between US elections and the investment climate. What effect will there be on their portfolio and the trajectory of their investments?
The data backs up the fact that many high-level investors in the United States today are concerned. A survey from the Brookings Institution found that a vast majority of core investors, 90%, see political risks in the US rising either moderately or steeply. Indeed, elections may create periods of volatility and uncertainty in the markets—this is true globally and in the United States. In this article, we explore some areas where election season and its outcome could make waves that may impact your portfolio.
Do Elections Dictate Market Performance?
It’s a common belief that the outcome of an election will have an immediate and long-term effect on the economy. That can drive many decisions that may not always prove the correct choice. According to a publication by JP Morgan, there is “no evidence that election results determine market performance over the long term.” A look at the historical S&P 500 charts reveals this is true; regardless of who wins, the market has averaged about a 7% return over the long term. This factor is essential to consider when making plans.
However, that does not mean that elections have no economic consequences whatsoever. Can they cause the market to vary appreciably in the short term? “Potentially, yes,” said Erik Boekel, Chief Commercial Officer at DHF Capital. “If the election outcome significantly differs from [pre-election] market expectations, it can cause an abrupt repricing of assets, elevating volatility and leading to higher risk premiums in prices.” Navigating the period just before and immediately after an election should involve careful planning.
We can’t put too much stock in predictions about long-term performance based solely on a victor. As we’ve seen, long-term trends point to relatively stable performance. Even so, elections can and sometimes do generate policy changes that could impact the investment climate or specific industries.
Tariff and Trade War Possibilities Continue
The phrase trade war can be a source of significant anxiety and volatility in the markets, especially with commodities. The US electoral outcome may considerably impact tariff policies over the next four years. An incumbent victory, for example, would likely signal a continuation of the status quo. There is also a potential for re-evaluating existing tariffs, but the current global economic climate may make this less likely.
Depending on potential electoral outcomes, far-reaching tariff changes could occur. All imported goods could become subject to a 10% import duty, with tariffs as high as 60% possible on imports from manufacturing giants such as China. Tariffs have complex economic impacts that can cause significant price variations. Some domestic industries may benefit, while international investments may weaken.
For some, that may trigger a rush to change their portfolio based on potential tariff increases. However, our CCO Erik Boekel states, “Investors do put deals into their positions based on an expected election outcome. However, those expectations can be proven wrong, and afterward, positions might get into a loss.” Making bets based on potential outcomes can be a risky proposition.
Election Year Returns Rarely Indicate a Pattern
Sector-by-sector economic performance can indeed vary based on electoral outcomes. For example, traditionally, fossil fuel elements in the energy sector have seen friendlier investment environments during Republican leadership. Healthcare and technology sectors tend to experience similar conditions under Democratic leadership. Yet recent data reveals that such basic assumptions don’t always prove accurate. Stock performance in fossil fuels increased during the Biden administration, while renewables rallied throughout the Trump administration.
The extent to which each party can influence large-scale economic trends is less significant than many expect. External factors in the marketplace can overcome political differences to shake things up. As an example, one must only consider the Covid-19 pandemic and its historical impacts on the economy.
Renewables vs. Fossil Fuels: Where Will the Money Go?
While energy stock performance defied the conventional wisdom over the last two presidencies, that doesn’t make other investors immune to campaign trail promises. Even at the institutional level, investors may hear promises to bolster a sector and decide to move money accordingly. Energy investments are popular, primarily because of the diversity of sub-sectors within the industry.
However, making electorally-based predictions about whether to embrace oil and gas or go all-in on wind and solar is not a practice backed up by the data. In one evaluation by Fidelity that examined ten different market segments, no discernible pattern in stock over-performance emerged. Investors should be mindful of that when planning their short-term strategies.
Broader Economic Trends Drive Change More Than Elections
Elections generate anxiety across society. In 2024, with 40 nations voting on their future, the economic and investment climate worldwide had a higher level of inherent risk than at other times. Charting your course through this period will be essential to your strategy. While we’ve seen that markets continue to grow and weather the storms over the long term, short-term volatility is possible. So are significant changes. “Elections can make a material difference if the newly-elected is more in favor of creating an investor-friendly environment,” Erik Boekel said.
That could be an opportunity for those with a higher appetite for risk. It can also be a potential pitfall. Are you concerned about your investment strategy or how to steer your portfolio through the uncertainty of election season? Speaking with a qualified financial advisor can help you gain more clarity on the relationship between the US elections and the investment climate—and your next steps.
