by Wayne Duggan, US News
The 2024 presidential election may be one of the biggest market-moving catalysts in the next 12 months. It's too early to speculate about a potential winner, but current polling indicates a likely rematch between Democrat Joe Biden and Republican Donald Trump. However, there may be room for an outsider to disrupt the rematch at some point, given both Trump and Biden have low favorability ratings among voters.
This upcoming election year will bring several challenges for investors and politicians alike. Unfortunately, the S&P 500's record during U.S. presidential election years suggests investors could experience some lackluster returns in 2024.
S&P 500 Performance in Election Years
Since 1952, the S&P 500 has averaged a 7% gain during U.S. presidential election years. While a 7% gain is far from disastrous, it is also well short of the 17% average S&P 500 gain in the year prior to an election year. It's also below the roughly 10% average annual total return for the S&P 500 in a typical year. Of course, it's important to remember that past performance does not guarantee future returns, and there have only been 17 presidential elections since 1952.
The good news for investors heading into 2024 is that the S&P 500 has not declined during a presidential re-election year since 1952 and has averaged a 12.2% annual gain in re-election years.
The presidential election is only one of many factors that influence the stock market during election years, but analysts say there is good reason for investors to expect strong returns in re-election years like 2024.
Jeffrey Buchbinder, chief equity strategist for LPL Financial, says presidents seeking re-election will often "prime the pump" by implementing fiscal stimulus measures and pro-growth regulatory policies to support the economy and the labor market.
"Every president who avoided recession two years before their re-election went on to win, and every president who had a recession within two years before their re-election went on to lose," Buchbinder says.
"This presents a tall hurdle for Biden, given so many leading indicators point to some economic contraction next year."
The federal funds rate is currently at its highest level in 22 years as the Federal Reserve continues its battle with inflation. Elevated interest rates increase borrowing costs for consumers and corporations, weighing on economic growth. U.S. gross domestic product grew 5.2% in the third quarter, but economists expect growth to slow in the upcoming election year. While the chances of a U.S. recession have fallen in recent months, the New York Federal Reserve's recession probability model suggests there is still a 51.8% chance of a recession within the next 12 months.
To make matters worse, Biden may have limited opportunities to prime the pump with new economic stimulus measures because Republicans control the House of Representatives and are unlikely to cooperate. However, the majority of the spending from the 2022 Inflation Reduction Act is slated for fiscal years 2024 through 2026, which could help support the economy and the stock market in the upcoming election year.
Top Election Year Market Sectors
From a sector standpoint, the financial services and energy sectors have been top performers during presidential election years since 1973. The technology sector, which has been by far the top overall performer in the past 50 years during non-election years, has been one of the worst-performing market sectors during presidential election years. The materials sector is the only sector that has performed worse than technology during election years.
Investors betting the pattern holds true again in 2024 can increase their allocation to financial services and energy sector exchange-traded funds, such as the Financial Select Sector SPDR Fund (ticker: XLF) and the Energy Select Sector SPDR Fund (XLE).
John Lynch, chief investment officer for Comerica Wealth Management, says the positions and policies of the candidates are largely what moves specific sectors, and those platforms can change on an election-to-election basis.
"A major issue with sector implications in one election year may prove to be a non-factor in another election. Moreover, issues like 'Medicare for All' can have bifurcating effects on sectors with sub-industry winners and losers within the same sector," Lynch says.
Different market sectors can also outperform, depending on which candidate is leading in the polls, and it's too early at this point for investors to anticipate a winner in 2024.
Market Performance: Biden vs. Trump
Since the two leading candidates in the 2024 election both have experience in the White House, investors can also take a look at how the stock market has performed during Trump's four years in office and Biden's three years.
During Trump's presidency, the S&P 500 gained 69.6% on a total return basis, which includes dividends. Under Biden, the S&P 500 has posted a total return of 19.5% through Dec. 8.
Trump's stock market outperformance relative to Biden is even stronger when looking at the tech-heavy Nasdaq Composite. The Nasdaq posted a total return of 142.2% under Trump, compared to a total return of 7% under Biden, through Dec. 8.
It's easy to give Biden and Trump credit or blame for stock market performance during their respective presidencies, but the COVID-19 pandemic dealt severe disruptions to the economy and the market in both 2020 under Trump and 2021 under Biden. These disruptions severely muddied the waters when it comes to economic and market performance data. For example, the U.S. economy averaged just 2.6% annualized GDP growth under Trump compared to 6.9% under Biden. However, those numbers are both skewed by the outlier 2.8% GDP drop in 2020 after the pandemic-related economic shutdowns.
2024 Investing Strategy
The upcoming election year may prove to be unpredictable and volatile. Fortunately for investors, analysts are generally optimistic about the outlook for stock prices in 2024.
The consensus 12-month analyst target for the S&P 500 is currently 5,068, according to FactSet Research, which would represent a new all-time high for the index and a 10% upside over the next 12 months based on its Dec. 8 closing price. On a sector basis, analysts see the most valuation upside for the energy sector (26.1%), which has historically been a top performer during re-election years.
Gargi Chaudhuri, head of iShares Investment Strategy, Americas at BlackRock, says investors should anticipate slowing economic growth and modestly positive overall equity market gains in 2024. However, Chaudhuri says the election is one of many risks the market faces in 2024, alongside inflation, interest rates and mounting geopolitical tensions.
"That points to a choppy path forward for equity markets and the potential for leadership to change frequently," she says.
"We therefore believe investors would be well served to be in risk-management mode in broad U.S. equity exposures, enabling them to take deliberate risk where, and when, opportunities arise."
Chaudhuri recommends investors manage risk in their portfolios by using buffered ETFs, such as the iShares Large Cap Moderate Buffer ETF (IVVM), and by increasing allocation to high-quality companies with strong balance sheets.
Original Post: https://money.usnews.com/investing/articles/election-2024-how-stocks-perform-in-election-years