Amid Focus on Elections, Don't Take Your Eyes Off Markets

As the 2024 presidential election approaches, investors are understandably focused on the political landscape. However, it's crucial not to overlook the fundamentals driving market performance. This article explores the relationship between elections and markets, emphasizing the importance of focusing on economic fundamentals and company-specific factors.

Historically, markets have risen after elections, regardless of the winner. According to CNBC data, the S&P 500 has averaged a 7% gain in election years since 1952. This pattern is partly due to the incumbent party's efforts to stimulate the economy and encourage job growth to secure reelection. However, market performance is also driven by economic growth, corporate profits, and inflation.

Market expectations and economic fundamentals significantly influence investor sentiment and market behavior during election years. LPL Financial found that the S&P 500 has generated an average return of 7% during presidential election years since 1952, with an even higher average of 12.2% when the incumbent president is running for reelection. This pattern is partly due to the incumbent party's efforts to stimulate the economy and encourage job growth to secure reelection.

However, market performance is also driven by economic growth, corporate profits, and inflation. TIAA found that a 60/40 portfolio had an average annual return of 8.7% across 24 presidential election years, similar to the 8.5% average during non-election years. Therefore, while elections may introduce short-term volatility, long-term market performance is more closely tied to economic fundamentals.

Geopolitical tensions and global economic conditions also play a significant role in shaping market performance during election years. For instance, in 2008, the global financial crisis and the Iraq War contributed to a 37% drop in the S&P 500. Similarly, in 2020, the COVID-19 pandemic and U.S.-China trade tensions led to a 34% decline. Conversely, periods of relative stability, like the 1990s, saw consistent market growth.

Investors should consider these factors alongside election outcomes when making investment decisions. Focusing solely on political events can lead to missed opportunities and poor investment choices. Instead, investors should prioritize a balanced approach, considering both macroeconomic factors and company-specific fundamentals.

In conclusion, while the 2024 election may capture investors' attention, it's essential not to take your eyes off the markets. Focusing on economic fundamentals, such as GDP growth and corporate earnings, is crucial for making informed investment decisions. Geopolitical tensions and global economic trends should also be monitored, as they can introduce volatility and present opportunities. By maintaining a long-term perspective and prioritizing fundamentals, investors can navigate election cycles and market dynamics effectively.