Markets
Will the US election impact your portfolio?
By Jared Kadziolka, CFA 17 October 2024 4 min read
As the US election approaches and the media attention intensifies, it's natural for investors to question the potential impact on their portfolios. With polls indicating a historically tight race and financial pundits offering conflicting advice on how to position investments for various political outcomes, investors may be left feeling uncertain about their next steps.
However, the reassuring truth is that long-term investment success doesn't hinge on accurately predicting short-term political events. Instead, it relies on maintaining a well-diversified portfolio that aligns with individual goals and financial circumstances.
This article will review the current election landscape and draw on historical market behavior to demonstrate that politics might generate headlines and speculation but tends to have a limited influence on overall market performance.
The US election landscape
On Nov. 5, Americans will head to the polls to elect their next president, with Kamala Harris and Donald Trump in a tight race and each having nearly equal chances of winning. While much of the attention is on the presidential contest, voters will also be deciding on new members of Congress. Congress, the legislative branch responsible for passing laws, is made up of two chambers—the House of Representatives and the Senate.
These two chambers must collaborate to pass legislation, and their control can significantly impact the president's ability to pursue their party’s policy agenda. Like the presidency, the balance of power in the Senate and House is also expected to be determined by a slim margin.
As a result, the most likely outcome of the election points to a divided government—where no single party controls the White House, Senate, and House of Representatives. This has been a common scenario over the past 50 years, and it is often seen favourably by the markets, as it reduces the likelihood of sweeping legislative changes or significant political uncertainty.
Historical returns under different government compositions
Source: YCharts
US stocks have historically delivered higher average returns when Congress is divided. Returns were lower when Democrats controlled both chambers and higher with full Republican control. However, market returns have historically been positive under all six government configurations.
Looking back at markets and US elections
The sitting president tends to garner too much attention in terms of their impact on the economy and markets. Looking back historically, markets have thrived, stagnated, corrected and rallied under both Democratic and Republican presidencies and various combinations of control in Congress.
US market performance under past presidents
|
PRESIDENT |
POLITICAL PARTY |
YEARS IN OFFICE |
S&P 500 RETURN |
|
William J. Clinton |
D |
1993-2001 |
210% |
|
Barack H. Obama |
D |
2009-2017 |
182% |
|
Dwight D. Eisenhower |
R |
1953-1961 |
129% |
|
Ronald W. Reagan |
R |
1981-1989 |
117% |
|
Donald J. Trump |
R |
2017-2021 |
67% |
|
Joseph R. Biden |
D |
2021-present |
52%* |
|
George H.W. Bush |
R |
1989-1993 |
51% |
|
Lyndon B. Johnson |
D |
1963-1969 |
46% |
|
Jimmy E. Carter |
D |
1977-1981 |
28% |
|
Gerald R. Ford |
R |
1974-1977 |
26% |
|
John F. Kennedy |
D |
1961-1963 |
16% |
|
Richard M. Nixon |
R |
1969-1974 |
-20% |
|
George W. Bush |
R |
2001-2009 |
-40% |
Source: YCharts
Performance represents price change only in USD.
* return as of Sept. 30, 2024
Even if an investor could know the outcome of an election in advance, that information alone wouldn’t offer clear guidance for portfolio decisions. While shifts in political power and policies can impact certain sectors, industries, or companies, predicting how those changes will play out is nearly impossible. Markets are extremely complex and dynamic and influenced by a wide array of factors, including the economic cycle, geopolitical events, and market sentiment. Changes in any number of nearly infinite combinations of potential future events will ultimately be far more impactful than policy changes alone.
For instance, despite the vastly different policy agendas of former President Obama and President Trump, the best-performing sectors during both of their terms were the same—technology and consumer discretionary. Similarly, though President Trump’s policies were far more favourable to the energy sector than those of President Biden, the energy sector under Trump was the worst-performing, while it has surged under Biden, even outperforming the tech sector.
With hindsight, it’s clear that the performance of these sectors and the broader market wasn’t driven primarily by who was in the White House. This illustrates how unpredictable markets are, regardless of who holds the presidency. Historically, markets have seen inconsistent returns under different administrations with the only similarity being that they have typically grown over time.
Final thoughts
While elections often create a backdrop of heightened uncertainty, history has shown that reacting to political developments in the short term is seldom a successful strategy. Instead, staying committed to long-term financial objectives is a more prudent approach. Markets have demonstrated a remarkable ability to rise over time, irrespective of who occupies the White House or which party holds a majority in Congress.
Moreover, broader forces such as the economic cycle and geopolitical events typically have a more significant impact on market outcomes than political shifts alone. Like election results, these factors are inherently unpredictable and uncontrollable. The best way to safeguard against the inevitable ups and downs is to recognize this unpredictability and construct a diversified portfolio that is aligned with long-term goals. By doing so, investors can be confident they are positioned for success, regardless of political climate or market sentiment.
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