Capital Clash: Theorising the Impact of the 2024 Presidential Elections on the US Stock Market

Capital Clash: Theorising the Impact of the 2024 Presidential Elections on the US Stock Market

As the 2024 US presidential election looms, the nation’s stock market faces a turbulent landscape of economic policy promises and electoral uncertainties. With the date set for the 5th of November with Joe Biden and Donald Trump emerging as the top candidates, investors navigate an uncertain terrain where each policy announcement and political shift can sway market dynamics dramatically. The market’s reactions mirror the electorate’s anticipation, with eyes fixed on each candidates’ economic agendas, regulatory plans and their potential impact on economic sectors whose effects are magnified against the vast differences in economic and political philosophy between Democratic and Republican parties.  Amidst this volatility, the stock market’s resilience and sensitivity underscore its pivotal role in reflecting and reacting to the evolving political and economic narrative leading up to the election day. The following article deconstructs the theorised public and expert opinions regarding how the US Stock market would shape its volatile response in the days leading up to the 5th of November when the presidential battle would be won and lost and markets would resolve.

Current Insights from the 2024 Presidential Elections

The 2024 elections were officially initiated in mid-January across states such as Iowa, New Hampshire and Nevada where early contests were held up until the 5th of March on which a great number of states held their preliminary elections. The results of these primary elections concluded in determination of the key candidates of the 2024 presidential elections with Donal Trump emerging from the Republican Party and Joe Biden emerging from the Democratic Party.  While their campaigns are already underway, it is not until mid-summer after the Presidential Debates during which each party will hold their national conventions and officially nominate its candidates for both presidential and vice-presidential candidates. It is between the national convention and the 5th of November in which campaigning is expected to be at its highest rigour with financial markets reacting dramatically to policy proposal and electoral creating an environment of uncertainty until all results are officially casted and counted and the new administration is inaugurated from the 20th of January 2025 onwards.

The above paragraph only provides a summarised snapshot of the key dates that define the 2024 US presidential election and is devoid of further electoral complexities. Nevertheless, this general overview is key to building our understanding on the current performance on the US stock market using the S&P500 as our proxy. According to LPL Financial analytics, since 1952, the S&P 500 has typically seen average returns of 7% during presidential election years and when the incumbent president seeks re-election, this average usually jumps to 12.2%. This year, however, the index has exceeded these historical averages significantly. The S&P 500 is up 14.6% year-to-date, marking its strongest start to an election year ever recorded by Goldman Sachs which represents a 31% surge from its low point in October 2023. These astronomic returns however are a product of narrow scope of player including firms like NVIDIA and Vistra whose technology blooms have significantly shaped the US stock markets. Nonetheless, equity research analysts the S&P 500 to sustain its bullish behaviour as investors rally in market devoid of the economic uncertainty and geopolitical tensions that loom the US stock market. This optimism is not limitless however given that a high degree of volatility soi expected in October in which analysts predict dramatic changes especially amongst industry-specific indices as each candidate campaigns their sectorial plans for fiscal spending.

Theory 1: The Election-Market Irrelevance Hypothesis

One view that seems to be shared among a minority of analysts is what we coin as the Election-Market Irrelevance Hypothesis. As implied by the name, this theory argues that the performance of US stocks is less likely to vigorously react in response to each candidates’ economic plans. This theory specifically posits that while volatility is expected, stocks are less likely to reach dramatic lows or astronomical highs which has been evinced through the historical performance of US stocks. It has been noted that the S&P 500 has performed well under both administrations during election years, averaging a 10% return since 1957 showing no correlation against proposed election outcomes other than in 2008 in which the US underwent a stagflationary recession.

This theory is also underpinned by the assumption that neither political party has the power to influence stock markets through fiscal propositions. With spending frequently surpassing tax revenues, the US Federal budget has always been at a historic deficit which is often overshadowed by the USA’s growth prospects, international trade and geopolitical disputes. As election campaigns predominantly focus on such fiscal plans, investors are less likely to react vigorously to fresh campaign announcements given that the general expectation is that all plans, irrespective of political party, are expansionary in nature. Alternatively, as of 2024, it is the Federal Bank and its monetary policies that can have a greater impact on the S&P’s behaviours which remains crucial at a time in which several stakeholders are counting on an expansionary monetary policy. In sum, the Federal Reserve’s monetary policy would have a more significant role in influencing stock market performance in 2024 and broader economic conditions than specific fiscal policies that are pitched and enacted by presidential candidates.

Overall, this theory encapsulates some of the essence of the Efficient Market Hypothesis that claims the irrelevance of certain exogenous factors in determining market outcomes entailing that US stock prices are likely to follow a volatile random walk in the days leading up to the 2024 Presidential Elections. According to corporate strategist, Brian Levitt, investors should be less interested in political affaires and more interested in private-sector plans and strategies that are pitched in by corporate leaders such as leveraging AI and proposed mergers and acquisitions which when responded to would yield positive effects on both financial markets and social wellbeing.  One of the assumptions that maybe underpinning Levitt’s philosophy is the intuition that the private sector boasts more economic potential that governing bodies in determining economic and social outcomes. However, if investors are to disregard the 2024 Presidential elections and balance their portfolios and investments in accordance to private sector information, we would also have to believe that corporate too are behaving accordingly which is unlikely to be the case in the real world. The theories that follow synchronise more with reality and reflect how the US stock market’s performance maybe indeed relevant to election outcomes and expectations.

Theory 2: The Election-Market Relevance Hypothesis

Despite the logical validity of the Election-Market Irrelevance Hypothesis, some analysts propose a nuanced perspective suggesting that electoral campaigns, polls, and policy proposals do influence investor behaviour and subsequently impact market performance. Psychologically, the media’s role is pivotal; expert analyses of economic plans from presidential candidates like Biden and Trump dominate headlines post-debate, prompting investors to adjust and rebalance portfolios based on which candidate’s policies promise greater economic stimulation. Historically right-wing capitalistic candidates like Donald Trump whose policies centre on business growth, trade and corporate profitability are more likely to yield consistently strong returns through-out the election with some volatility if the probability of his victory is relatively high. Moreover, left-wing democratic candidates like Joe Biden tend to focus on wellbeing-oriented polices that cater less to the interests of corporates leading to poorer or more ambivalent stock market performance during the lections. However, these propositions would only hold true in theory and assumed that every investor perceive each candidate’s fiscal plans to yield the same economic outcome. Pragmatically this is not possible and it is due to this variance in investor opinions about polices that create the volatility of stock markets during election months. A better way to approach the theory would be to trace how stock market behaviour may influence election outcomes that vice versa.

It has been suggested by experts that stock markets behave in a manner that predicts the presidential candidate thus forming a relevant link between elections and market behaviour. The evidence for this claim stems from a Forbes Report that stock market returns have remained an accurate proxy in predicting the presidential winner of an election as illustrated in 87% of the cases since 1928. The main behavioural indication is that a declining stock market signals an incumbent party’s defeat while a rising stock market predict a new candidate’s victory or an incumbent party’s re-election. Interestingly, more specific insights from a T. Rowe Price report found that the year following a Democratic win sees an average market gain of 11.3%, compared to 6.6% after a Republican victory. Applying these general insights to the current S&P performance yields ambiguous results predicting both the victory of Biden and Trump given its all-time strong performance. It is important to note while the empirical findings that support the theory maybe true, the S&P 500 as of now is yet to activate its prediction for the 2024 elections and it would be more relevant to draw such conclusions in October when markets are set to be the most volatile and most indicative of future outcomes. In sum strong performance could predict the victory of challenger, Donald Trump if his prospects and the opposite case if his prospects are low.

Conclusion – Guiding your Election-year Investment Strategy

As the 2024 US presidential election approaches, investors face a landscape of economic uncertainty shaped by policy promises and electoral dynamics. The theories discussed offer contrasting views on the impact of elections on stock market behaviour: the Election-Market Irrelevance Hypothesis suggests that market movements are largely independent of election outcomes, driven more by broader economic factors and monetary policy, while the Election-Market Relevance Hypothesis argues that campaigns and policies can sway investor sentiment and influence market performance.

Given the complexity and unpredictability of electoral cycles, investors are advised to maintain a balanced and diversified portfolio that considers both short-term volatility and long-term growth prospects. While political developments may create market fluctuations, focusing solely on electoral outcomes may overlook fundamental economic drivers and sector-specific opportunities.

In practice, prudent investment strategies should prioritize thorough research into corporate fundamentals, technological innovations, and global economic trends. This approach helps mitigate risks associated with political uncertainty and positions portfolios to capitalize on broader market trends regardless of electoral outcomes.

Ultimately, while elections can introduce short-term market volatility, successful investment strategies rely on a disciplined approach that integrates both macroeconomic analysis and company-specific insights. By navigating these complexities with a focus on long-term value and resilience, investors can navigate election-year uncertainties and pursue sustainable growth in their portfolios.

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