By President Joe Biden and former President Donald Trump are gearing up for a political rematch this November, promising to take the country in different directions with their contrasting policies.
Investment Strategy Leading Up to Elections
Historically, investors have favored a cautious approach in the months leading up to elections, opting for safe bets before embracing higher risks post-election. However, the conventional playbook’s effectiveness this time around is being called into question.
According to Ned Davis Research, since 1972, utilities and consumer staples stocks have been the top performers in the S&P 500 during the six months preceding presidential elections. These sectors have seen median returns of 9.3% and 7.8% respectively, outperforming the index in almost two-thirds of cases.
On the flip side, information technology and materials stocks have trailed behind, delivering returns of 2.4% and 1.7% during the same period.
Sector Performance Around Elections
Leading up to elections, cyclical sectors typically begin outperforming around a week before the big event and continue to surpass defensive sectors in the following year.
Ed Clissold, chief U.S. strategist at Ned Davis Research, emphasized the aversion investors have towards uncertainty, irrespective of its source – and political uncertainty is no exception.
Unique Circumstances in 2024
While historical trends suggest a shift towards defensive investments by the end of the first quarter, 2024 presents a different scenario with strong economic growth and the possibility of rate cuts by the Federal Reserve. These factors typically favor cyclical sectors, according to Clissold.
In light of a favorable environment characterized by falling inflation, robust economic growth, and accommodative Fed policies, this year’s investment landscape might deviate from historical norms.
Market Performance Post Election: Trump vs. Biden
Surprisingly, many industries experienced both outperformance and underperformance immediately after the elections of both Trump and Biden. According to Ned Davis Research, banks, energy equipment and services, consumer finance, and airlines stocks all outperformed the S&P 500 in the 21 days following the 2016 and 2020 contests. On the flip side, sectors such as utilities and household products underperformed during the same period.
Uncertain Market Outlook
If the economy takes a turn for the worse, the typical post-election rally may not be a guaranteed outcome. Trump has pledged a 10% across-the-board tariff on imports, which could potentially lead to inflation and negatively impact global trade. On the other hand, Biden aims to raise taxes on the wealthy and corporations, with a potential opportunity to do so when Congress addresses expiring provisions in Trump’s 2017 tax law next year. These policy proposals may not bode well for stocks under certain circumstances.
J.P. Morgan’s chief market strategist, Marko Kolanovic, expressed that there might not be any market upside directly linked to the November election. The outcome could either maintain the status quo (the incumbent party retaining power) or introduce increased uncertainty surrounding global trade and geopolitical tensions.
Historical Perspective
When it comes to the implications of the election on the market, history could provide some insights into what lies ahead for investors. However, it does not offer a definitive playbook for predicting market movements.
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