How the Erosion of the Four-Year Election Cycle Impacts Market Volatility and Investor Strategy

The traditional four-year U.S. presidential election cycle has long served as a predictable framework for investors, with historical patterns suggesting strong market performance in pre-election and election years, while post-election and midterm years often bring heightened uncertainty and volatility according to research. However, the landscape has shifted dramatically since the 2010 Citizens United decision, which reshaped campaign finance by enabling unlimited independent expenditures and the rise of "dark money" groups. This transformation has eroded the predictability of the four-year cycle, introducing prolonged political uncertainty and altering market volatility patterns. For investors, understanding these dynamics is critical to navigating an increasingly complex environment.

The Traditional Election Cycle and Market Behavior

Historically, the S&P 500 has delivered robust returns during the third year of a presidential term (the pre-election year), averaging 10.2% annually, while election years have seen positive returns in 83% of cases since 1928. Post-election and midterm years, by contrast, often correlate with higher volatility, as policy uncertainty peaks. For example, the three months following U.S. elections have historically averaged stronger returns than the preceding three months, reflecting reduced political uncertainty and renewed investor confidence. This pattern has been a cornerstone for strategic asset allocation, with investors often adjusting portfolios to capitalize on cyclical trends.

The Erosion of Predictability: Campaign Finance Reforms and Dark Money

The 2010 Citizens United ruling catalyzed a seismic shift in campaign finance, enabling corporations, unions, and nonprofits to spend unlimited funds on political advocacy. By 2024, billionaire spending in federal elections had surged to $2.6 billion-nearly 20% of total election spending-with 80% of this funding flowing through avenues prohibited before 2010. The rise of dark money groups, which operate without donor transparency, has further distorted the political landscape. Over the past decade, these groups have spent $963 million on elections, a stark increase from $129 million in the decade prior.

This influx of money has extended election cycles far beyond the traditional four-year framework. Prolonged campaigns, fueled by continuous spending and negative advertising, create sustained uncertainty about policy outcomes. For instance, during the 2024 election, market volatility doubled during election weeks, particularly in closely contested races, as dark money-driven messaging amplified public anxiety. The lack of transparency in donor identities exacerbates this uncertainty, making it difficult for investors to anticipate regulatory or fiscal policy shifts.

Market Volatility and the New Political Reality

The interplay between extended election cycles and dark money has redefined market volatility patterns. While economic policy uncertainty (EPU) typically spikes in the pre-election period and subsides post-election, the post-2010 era has seen prolonged EPU due to the indefinite nature of modern campaigns. For example, the 2024 election's prolonged and contentious nature contributed to heightened volatility even after the election, as investors grappled with uncertainty over Trump's proposed tax and trade policies.

Sectoral responses to political uncertainty also highlight the erosion of traditional cycles. Defense and energy sectors often benefit under Republican administrations, while healthcare and clean energy gain traction under Democrats. However, the influence of dark money has blurred these sectoral trends, as policy outcomes increasingly reflect the priorities of wealthy donors rather than broad public sentiment. This fragmentation complicates strategic asset allocation, as investors must now account for unpredictable policy shifts driven by opaque financial interests.

Investor Strategy in a Post-Citizens United Era

For investors, adapting to the new political reality requires a nuanced approach:
1. Hedging During Prolonged Uncertainty: Given the extended volatility caused by drawn-out campaigns, investors should consider hedging strategies such as options or diversified portfolios during election periods.
2. Sectoral Flexibility: Focus on sectors less sensitive to policy shifts, such as technology or consumer staples, while maintaining agility to pivot toward politically favored sectors as clarity emerges.
3. Long-Term Fundamentals Over Short-Term Noise: While political uncertainty drives short-term volatility, long-term market performance remains anchored to economic fundamentals. Investors should prioritize companies with strong earnings resilience.
4. Monitoring Dark Money Trends: Track spending patterns of dark money groups to anticipate potential policy shifts, particularly in sectors like healthcare, energy, and taxation.

Conclusion

The erosion of the four-year election cycle, driven by campaign finance reforms and the rise of dark money, has introduced unprecedented volatility into financial markets. While historical patterns still offer some guidance, the prolonged uncertainty of modern elections demands a recalibration of investor strategies. By acknowledging the role of political finance in shaping market dynamics, investors can better navigate an environment where policy outcomes are increasingly influenced by opaque financial interests.