Here’s some good news for investors who are nervous about what promises to be a very controversial 2024 US presidential election: History shows that stocks tend to rise in the year leading up to Election Day.
But there’s a problem, noted Saira Malik, chief investment officer at Nuveen, which has $1.2 trillion in assets under management: While the S&P 500 SPX has seen an average total return of about 10% in presidential election years based on data dating back to 1928., the large-cap index actually rose by more than that between early November and the end of last year.
In other words, those pre-election gains may have already occurred.
“That’s kind of an interesting statistic and one of the many reasons why we’re a little more concerned about stocks getting to the start of 2024,” Malik told MarketWatch in a phone interview.
Noveen
These other reasons include the tendency for markets to be more volatile in election years, as well as concerns that investors are still pricing in more interest rate cuts than the Federal Reserve is likely to deliver, Malek said. She noted that stocks are also expensive, with the S&P 500 trading at a premium of about 20% compared to its average valuation since 2010.
Investors also know that the 2024 election is likely to be very controversial. Donald Trump heads into Tuesday’s Republican primary as the front-runner for his party’s nomination as he seeks a rematch in November with President Joe Biden.
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Trump is campaigning amid several legal problems. Trump faces charges in Washington, D.C., and Fulton County, Georgia, in election interference cases, and was charged last year in a bribery money case and a secret documents case. He has denied any wrongdoing and said the prosecutions were politically motivated, while repeating false claims about his loss in the 2020 election.
Biden faces low approval ratings, including within his own party. An ABC News poll conducted this week found that 57% of Democrats and Democratic-leaning independents would be satisfied with a Biden nomination, while 72% of adults aligned with Republicans would be satisfied with having Trump as their party’s nominee.
On the other hand, concerns are growing about political dysfunction in the United States. Last year’s standoff over the federal debt ceiling, followed by the ouster of Kevin McCarthy as Speaker of the House, highlighted concerns among some investors that confidence in American institutions and governance was beginning to erode.
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As the election approaches, an increasingly contentious political backdrop may be a recipe for increased market volatility. Malik said that the disputed election result could increase this volatility.
Presidential election years also mean that investors must be prepared for a barrage of charts and tables analyzing historical market performance around the quadrennial event.
Acknowledging the “risk of a jinx,” John Lynch, chief investment officer at Comerica Wealth Management, highlighted the following that stocks have never posted a year-over-year decline when an incumbent president — win or lose — runs for re-election. This includes 2020, when stocks suffered a collapse in February and March due to the onset of the Covid-19 pandemic, but quickly recovered to post annual gains.
Strategas Research Associates
Going back to 1952, the index has suffered annual declines in an election year only three times – 1960, 2000 and 2008. All three years were “open” election years, with no incumbent running for re-election, Lynch noted.
However, market performance, as much as it reflects the economy, may also be predictive of a candidate’s prospects. Lynch noted that every president who managed to avoid a recession in the two years before being re-elected won a second term, while every president who suffered a recession in that period ended up losing.
He noted that stocks typically outperform in presidential election years when the incumbent wins. After all, a strong economy and market likely mean that voter sentiment supports the incumbent president.
Meanwhile, the pattern in years when incumbents lose tends to include a pair of sell-offs, one during the peak of the early spring primary season and the other after the party conventions in the late summer.
This left the stock market with apparently strong predictive power, Lynch said.
In 24 presidential elections since 1928, the trend of the index was a clear message of the election results, Lynch said, citing data from Strategas. If the S&P 500 is positive in the three months before the election, the incumbent or the candidate of the incumbent’s party won. Of the four times the index was incorrect, the index rose but the incumbent party’s candidate still lost.
US stocks saw a strong rally in 2023, in line with the so-called presidential cycle that typically sees strong gains in the third year of a president’s term. Stocks rallied to start the new year, but ended last week on a strong note, with the S&P 500 posting its first record close in more than two years.
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The Dow Jones Industrial Average (DJIA) also posted a record close, up 0.7% during the week, while the Nasdaq Composite COMP saw a 2.3% weekly advance as technology stocks reasserted their leadership.
At the same time, strong technology performance may reflect concerns about consumer survival, Nuveen’s Malik said. The company asserts that the combination of cyclical risks and politically motivated fluctuations provides a case for defence.
This includes a focus on stocks of dividend growers — companies that have consistently increased their profits over time — as well as global infrastructure projects that stand to see more benefits from trends that favor reshoring of manufacturing, onshoring, and other changes to supply chains.
Dividend growth and global infrastructure stocks have historically influenced markets relatively well, Malik said, underscoring Nuven’s concerns about a potential drawdown following the “remarkably strong” stock rally seen over the last two months of 2023.