Elections 2024: How stocks perform in election years

Regardless of which party wins the presidency, markets are trending higher: The stock market's success has not been significantly impacted by the party in office. The general market trend has been rising during the administrations of eight Democratic and eight Republican presidents since 1933. For investors, it is more important to stick to a long-term investing strategy than the outcome of an election.

Parties typically win reelection when the S&P 500 rises: The stock market's behavior in the lead-up to presidential elections has been a remarkably accurate predictor, anticipating 20 of the last 24 outcomes since 1936. Historically, when the S&P 500 Index rises in the three months preceding an election, the incumbent party is likely to retain power. Conversely, a decline in the S&P 500 during this period often signals a change in leadership.

This correlation occurs because equity markets tend to "price in" future uncertainties, particularly upcoming elections. Investors' expectations about the potential impacts of political shifts on the economy drive market performance, making the S&P 500 a forward-looking indicator in the electoral context.

Returns are increased by staying committed and contributing regularly. The study discovered that during election years, investors who either completely invested or contributed monthly beat those who refrained from investing. The results imply that, especially over more extended periods, sticking to an active investing strategy rather than sitting it out results in more outstanding average portfolio balances.

The Action you need to take:

1. Invest consistently with dollar-cost averaging: Put an end to attempting to time the market for the election. Using dollar-cost averaging, you can invest a set amount regularly, just like clockwork. This technique can help you purchase fewer shares during high prices and more during low ones, reducing the total cost of your investment.

   Source: Capital Group, Board of Governors of the Federal Reserve System(U.S), RIMES, Standard & Poor's.

2. Prepare for emergencies with a high-yield savings account: Your safety net in terms of finances is an emergency reserve. Put money aside for unforeseen costs in an easily accessible account, such as a cash management or high-yield savings account. This guarantees that you won't have to withdraw from your investments in times of need. Traditionally one of the lowest-risk investment vehicles, money market funds have seen a significantly more significant influx of capital from investors during election years. In contrast, the year after an election has seen the most important net inflows into equities funds.

   

   Source: Morningstar

3. Think long-term and stay calm: The market can be volatile, particularly in the months before Election Day, but you shouldn't let momentary declines impair your judgment. Recall that these swings are only temporary and that you are investing in the future. Remain mindful of your long-term objectives and refrain from making snap judgments.

   

   Source: Capital Group

4. Seek professional guidance when needed: If unsure about your portfolio’s diversification or asset allocation, consider speaking with a financial advisor. They can assess your financial situation and goals and recommend personalized strategies to optimize your portfolio.

The Bottom Line

Election years are a test of patience and strategy. While volatility is inevitable, intelligent investors focus on aligning their portfolios with expected policy shifts. Stay informed, adapt your plan, and remember—markets reward those who keep a steady hand amidst the noise.