Elections and the Market: Historical Perspective and Current Focus
By
Tom Wald, CFA®, Chief Investment Officer, Transamerica Asset Management, Inc.
In this article we review:
Why we believe presidential elections should be viewed as only one of many factors influencing market returns
Why we believe, all else being equal, markets prefer split-party leadership between the White House and Congress
Why we see the prospect of changes in the federal tax code as an upcoming market focus if Vice President Harris wins the presidency
Why we see potentially escalating trade tariffs as an upcoming market focus if former President Trump wins back the White House
As the presidential and congressional elections take on increasing market focus between now and early November, we believe the following points are important for investors to consider:
Historical market returns after election years have shown little variance versus longer term averages. In the 96 years spanning 1928 through 2023, the compounded annualized total return on the S&P 500® (price gains plus dividends) has been 9.6%. In the 24 calendar years immediately following presidential elections since 1928, the annual total returns in those years have averaged extremely close to that level at 10.3%. In further segmenting those post-election years into the 13 calendar years immediately following an election in which the incumbent presidential party retained control of the White House, the average total return was 9.4%, and in the 11 calendar years in which the non-incumbent party regained the presidency, those averaged out to 11.3%. All considered, we do not view these return differentials as being statistically significant versus the overall long-term average.
Elections are perhaps best viewed as one of many factors influencing the markets. It is important to note that in each of the 24 calendar years immediately following presidential elections since 1928, there were numerous other factors and dynamics influencing the markets, in many cases equally or more significantly than the elections themselves. Examples include the backdrop of the Great Depression in 1933 and 1937, World War II in 1941 and 1945, high inflation, rising interest rates, and recession in 1981, the horrific terrorist attacks of 2001, the Federal Reserve’s historic response to the global financial crisis in 2009, and the COVID-19 pandemic during 2021. Therefore, it is our perspective that, for the most part, presidential elections should be viewed as just one of many elements impacting the markets. We also believe that over the course of time, stock and bond prices tend to follow economic and business cycles more so than political ones.
Nonetheless, in our view, there are specific election-based issues the markets are likely to focus on to some extent between now and November and throughout 2025. These include:
Potential outcome of split-party leadership between the White House and Congress. We believe there is a strong probability the markets will most appreciate an election resulting in split-party leadership, meaning whichever party fails to win the presidency achieves a majority in either or both the Senate and/or House of Representatives. Such a scenario, all else being equal, would likely provide the markets with some degree of comfort in neither party advancing too much of a partisan economic or regulatory agenda.
A Harris victory will likely create additional market focus on upcoming changes to the federal tax code in 2025. Should Vice President Harris be victorious in the presidential election, investor attention could quickly turn to various provisions within the Tax Cuts and Jobs Act of 2017 (aka Trump Tax Cuts) that are set to expire by the end of 2025. Given this timetable, markets will probably take a keen interest as to how the Harris administration might look to revise individual and corporate tax rates, capital gains tax rates, and even potentially propose unrealized capital gains taxes on certain high net worth individuals. This focus will likely be heightened if the Democrats achieve a clean sweep in winning majority control of the Senate and House of Representatives along with the White House.
A Trump victory will likely generate market attention on extended and additional trade tariffs. If former President Trump prevails, markets could quickly focus on how far he might extend existing tariffs on China as well as potentially other countries and what might be the inflationary and international trade impacts of doing so. Investors may recall original implementation of trade tariffs on China during the previous Trump administration added a good bit of market volatility during 2018.
In summary, we caution investors not to place too much emphasis on the upcoming November elections, as history has displayed the markets’ ability to discount and absorb changes in political leadership in line with other factors influencing stock and bond prices. In the year ahead, we would include the likelihood of further federal reserve rate cuts, a potential soft landing in the economy, normalization of inflation, and rising corporate earnings growth as market factors potentially outweighing the upcoming election results. So, while the past several months have seen unique twists and turns unlike any election over the past century, it is important to also note that history infers high drama in the world of politics does not necessarily translate into high drama for the markets.
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Past performance does not guarantee future results. Indexes are unmanaged and an investor cannot invest directly in an index.
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