Presidential Elections, Market Corrections: Will History Repeat Itself This Year?

 

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Presidential elections and market corrections have a long history of companionship. Given the rampant rhetoric between the right and left, such is not surprising. Such is particularly the case over the last two Presidential elections, where polarizing candidates trumped policies.

From a portfolio management perspective, we must understand what happens during election years concerning the stock market and investor returns.

Since 1833, the S&P 500 index has gained an average of 10.03% in the year of a presidential election. By contrast, the first and second years following a Presidential election see average gains of 6.15% and 6.94%, respectively. There are notable exceptions to positive election-year returns, such as in 2008, when the S&P 500 sank nearly 37%. However, overall, the win rate of Presidential election years is a very high 76.6%

Since President Roosevelt’s victory in 1944, there have only been two losses during presidential election years: 2000 and 2008. Those two years corresponded with the and the On average, the second-best performance years for the S&P 500 are in Presidential election years.Presidential Elections/Stock Market Returns Cycles

For investors, with a “ of 76%, the odds are high that markets will most likely finish the 2024 Presidential election year higher. However, given the current economic underpinnings, I would caution completely dismissing the not-so-insignificant 24% chance that a more meaningful correction could reassert itself. Given the recent 15-year duration of the ongoing bull market, the more extreme deviations from long-term means, and ongoing valuation issues, a “ might increase those odds a bit.

S&P 500-Standard Deviation from 200-DMA

That deviation is more significant when looking at the 1-year moving average. Current deviation levels from the 52-week moving average have generally preceded short-term market corrections or worse.S&P 500 Index Deviation From-52-Week MA

However, as stated, while the market will likely end the year higher than where it started, Presidential election years have a correctional bias to them during the summer months.

Will Policies Matter

The short answer isHowever, not in the short term.

Presidential platforms are primarily to get your vote. As such, a politician will promise many things that, in hindsight, rarely get accomplished. Therefore, while there is much debate about whose policies will be better, it doesn’t matter much as both parties have an appetite for through continuing increases in debt.Read GDP-

However, regarding the financial markets, Wall Street tends to abhor change. With the incumbent President, Wall Street understands the The risk to elections is a policy change that may undermine current trends. Those policy changes could be an increase in taxes, restrictive trade policies, cuts to spending, etc., which would potentially be unfriendly to financial markets in the short term.

This is why markets tend to correct things before the November elections. A look at all election years since 1960 shows that markets did rise during election years. However, notice that the market tends to correct during September and October.Average Election Year Market Performance (1960-2019)

Notably, that data is heavily skewed by the decline during the 2008 “also a Presidential election year. If we extract that one year, returns jump to 7.7% annually in election years. However, in both cases, returns still slump during September and October. The chart below shows that 2024 is running well ahead of historical norms.

Elections Year Returns vs 2024

Lastly, while policies matter over a longer-term period, as changes to spending and regulation impact economic outcomes, market performance during SECULAR market periods varies greatly. During secular (long-term) bull markets, as we have now since 2009, Presidential election years tend to average almost 14% annually. That is opposed to secular bear markets, which tend to decline by 7% on average.Elections Year Performance-Bull vs Bear Markets

However, one risk that has taken shape since the could have an outside effect on the markets in 2024.

The Great Divide

While you may feel strongly about one party or the other regarding politics, it doesn’t matter much regarding your money.

Such is particularly the case today. As we head into November, for the voters will cast ballots for the candidate they dislike less, not whose policies they like more. More importantly, most voters are going to the polls with large amounts of misinformation from social media commentators pushing political agendas.

Notably, the market already understands that with the than at any other point in history, the likelihood of any policies getting passed is slim. (2017 was the latest data from a 2019 report. Currently, that gap is even more significantPolitical Polarization in the US

The one thing markets do seem to prefer – “

Political Gridlock

What we can derive from the data is the odds suggest the market will end this year on a positive note. However, such says little about next year. If you go back to our data table above, the 1st year of a new Presidential cycle is roughly a 50/50 outcome. It is also the lowest average return year, going back to 1833.

Furthermore, from the election to 2025, outcomes have been overly dependent on many things continuing to go “

These risks are all undoubtedly possible.

However, when combined with the longest-running bull market in history, high valuations, and excessive speculation, the risks of something going wrong have risen.

So, how do you position your portfolio for the election?

Portfolio Positioning For An Unknown Election Outcome

Over the last few weeks, we have repeatedly discussed reducing risk, hedging, and rebalancing portfolios. Part of this was undoubtedly due to the exaggerated rise from the November lows and the potential for an unexpected election outcome. As we noted in “

That advice continues to play well in setting up your portfolio for the election. As outlined, the historical odds suggest that markets will rise regardless of the electoral outcome. However, those are averages. In 2000 and 2008, investors didn’t get the

Such is why it is always important to prepare for the unexpected. While you certainly wouldn’t speed down a freeway “it makes little sense not to be prepared for an unexpected outcome.

Holding a little extra cash, increasing positioning in Treasury bonds, and adding some “ to your portfolio will help reduce the risk of a sharp decline in the months ahead. Once the market signals an “ you can take “ and speed to your destination.

Of course, it never hurts to always “

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