Market Performance in the Month Leading Up to U.S. Presidential Elections

Election day is Tuesday, November 5, 2024. That's just 29 days away. The U.S. Presidency is on the line, and the two candidates vying for the role couldn't be more different in any respect, while the race couldn't be any closer with just weeks remaining.

That's a recipe for huge uncertainty – and as any experienced market participant or analyst will tell you, markets hate uncertainty. In most cases, uncertainty plays worse than bad news that's certain. Bad news is addressable. Once a situation is tangible, people have a chance to imagine how it might be workable, even if it's not ideal. 

But that process can only begin once Schrödinger's box has been opened. Before that box opens, we tend to see heightened market volatility, as a general rule.

With that in mind, we look here today at how the market has handled the pre-election run historically, and what principles we can abstract from that record to be applied today.

Key Historical Trends

1. Volatility Increases: Data shows that market volatility tends to rise in the weeks leading up to an election. The CBOE Volatility Index (VIX), often referred to as the fear gauge, has historically seen upticks during this period as investors react to polls, debates, and news events that could sway the election outcome.

2. Market Performance Varies by Incumbent Party: When the incumbent party is perceived to be leading, markets often remain relatively stable, reflecting continuity in policies. If the challenger is gaining momentum, markets may react more cautiously due to anticipated changes in policy direction.

3. Sector-Specific Movements: Certain sectors are more sensitive to potential policy shifts. For example, healthcare, energy, and defense stocks might experience significant movements based on the candidates' platforms. Investors may adjust their portfolios in anticipation of regulatory changes affecting these industries.

Historical Performance Analysis

To provide a clearer picture, let's examine the stock market's performance during the month leading up to several recent presidential elections:

- 2020 Election (Trump vs. Biden):

  - Market Context: The election occurred amid the COVID-19 pandemic, adding another layer of uncertainty.

  - Performance: The S&P 500 experienced increased volatility, with concerns over the pandemic's economic impact and potential shifts in tax and regulatory policies under a new administration.

  - Outcome: Despite the volatility, the market rebounded strongly after the election, buoyed by vaccine developments and economic stimulus expectations.

  - One wrinkle with this example is that the uncertainty remained in place, to some extent, after election day due to both the prominence of mail-in voting as a pandemic consequence and the incumbent's unwillingness to concede following the end of vote counting.

- 2016 Election (Trump vs. Clinton):

  - Market Context: Polls largely favored Clinton, but Trump's unexpected victory led to sharp market reactions.

  - Performance: In the month before the election, the S&P 500 saw modest declines as uncertainty grew.

  - Outcome: Post-election, markets rallied significantly, driven by expectations of corporate tax cuts and deregulation under the Trump administration.

- 2012 Election (Obama vs. Romney):

  - Market Context: The economy was recovering from the Great Recession, and policy continuity was a focal point.

  - Performance: The market remained relatively stable, with slight gains in the month leading up to the election.

  - Outcome: Obama's re-election led to continued policies, and the market responded positively in the following months.

- 2008 Election (Obama vs. McCain):

  - Market Context: The election occurred during the peak of the financial crisis.

  - Performance: The S&P 500 suffered significant declines due to the crisis, dropping sharply in October.

  - Outcome: Post-election, the market continued to struggle until policy interventions helped stabilize the economy.

  - It's important to note that, in this case, the election was a foregone conclusion weeks in advance due to wide polling differentials, so uncertainty about the presidency was not a significant factor impacting markets during the anticipatory month.

Factors Influencing Pre-Election Market Performance

1. Economic Indicators:

   - GDP Growth: Strong economic growth tends to favor the incumbent party, which can stabilize markets.

   - Unemployment Rates: Lower unemployment can boost investor confidence in the policies of the current administration.

2. Political Uncertainty:

   - Policy Differences: Stark contrasts between candidates' economic policies can lead to market jitters.

   - Election Polls: Tight races amplify uncertainty, often leading to increased market volatility.

3. Global Events:

   - International Crises: Geopolitical tensions or global economic issues can overshadow election effects.

   - Trade Relations: Candidates' stances on trade can impact multinational companies and investor expectations.

Investor Behavior and Sentiment

- Risk Aversion: Many investors adopt a risk-averse stance leading up to elections, reducing equity exposure.

- Portfolio Rebalancing: There may be shifts toward defensive sectors like utilities and consumer staples.

- Cash Positions: An increase in cash holdings can occur as investors wait for post-election clarity.

Implications for Investors

While historical trends provide valuable insights, it's essential to recognize that past performance is not a guaranteed predictor of future results. Investors should consider the following strategies:

1. Long-Term Perspective: Maintain focus on long-term investment goals rather than short-term market fluctuations.

2. Diversification: Ensure portfolios are well-diversified to mitigate risks associated with election-induced volatility.

3. Stay Informed: Keep abreast of policy proposals from candidates that could affect specific industries or the broader economy.

4. Avoid Emotional Decisions: Resist the urge to make impulsive trades based on election news or market rumors.

Going from Uncertainty to Certainty is Typically Good for Markets

The month leading up to a U.S. presidential election is often characterized by increased market volatility and uncertainty. Historical patterns suggest that while the stock market may experience short-term fluctuations during this period, it typically adjusts as election results become clear and policies are enacted.

Our advice: This remains a bull market with a favorable policy backdrop. Pre-election uncertainty is likely to be a buying opportunity as it has generally been in years past. Which party wins the White House is usually not a significant factor.