How the U.S. election may impact your portfolio

Key takeaways:

• We recommend investors ignore any short-term volatility around the U.S. election cycle. A resilient U.S. economy and expected Fed pivot to rate cuts will likely impact the markets more in 2024 than politics.
• Historically, stocks and bonds outperform cash during the “pause period” between the Fed’s last rate hike and first rate cut. Given expectations for the Fed’s next move to be a cut, now could be an opportune time to get out of cash.
• The historic performance of stocks during election years also supports the potential opportunity for investors. Stocks historically outperform their long-term average in election years, with the second half of the year typically the strongest.

Politics are inevitably going to be top of mind in 2024 – especially in the current environment of intense partisan rancor. But investors are best served by focusing on the fundamentals.

Here are three reasons why investors are likely to benefit from ignoring any short-term volatility around the election cycle and sticking to their long-term plan.

1. Escape the ‘cash trap’ during the Fed’s pause period

In the past five Fed cycles since 1990, bonds have produced average annualized returns of 14.8% during the period between the last Fed rate hike and first rate cut – the “hold period” - vs. just 5% for cash.

Stocks have also delivered strong performance, outperforming both cash and bonds in prior hold periods.¹

Stocks and bonds have outperformed cash in prior Fed ‘hold’ periods
Average total return (annualized) in prior five Fed hiking cycles

The historic outperformance of stocks and bonds vs. cash during prior Fed hold periods is particularly noteworthy at this juncture for two reasons:

• Rate cuts may not occur as quickly nor as frequently as Fed Fund futures currently predict, but there’s widespread consensus about the Fed cutting rates at some point in 2024.
• There are currently record levels of cash in money market funds. Investors typically build up cash in election years, but the record $6 trillion currently invested in money market funds makes 2024 an outlier. ²

2. U.S. stocks have risen regardless of which party holds the White House

Since 1926, amid repeated shifts of the political landscape, the S&P 500 has produced cumulative returns of 1,456,754%.³

Stocks have continued higher regardless of party holding the presidency
Growth of $1k, 1/1/26 – 12/31/23

The market’s political agnosticism is also evident on a shorter timeframe: people who stayed invested performed far better than those who only invested when one party was in power. The bottom line is investing based on political beliefs has historically led to underperformance compared to staying focused on the long term -- and staying invested.

It’s time in the market that matters… not the president’s political party
$1,000 invested from 12/31/1953-12/31/2023

3. History suggests that presidential election years have tended to be good for stocks

If the market’s long-term performance doesn’t assuage your political concerns, note the returns of stocks during presidential election years. On average, stocks have risen 11.6% during presidential election years since 1926, slightly better than the market’s average 10.3% return in all years.⁴

Drilling down further, stocks tend to follow a pattern during presidential election years: sluggish in the first half, followed by a big second half. Historically, the third quarter has delivered the strongest returns, with an average return of 6.2%.

Many Americans have strong feelings – and genuine concerns - about politics, but history suggests that presidential election years tend to be pretty good for stocks, especially in the second half of the year. In other words, what happens in Washington D.C. largely stays in Washington D.C.

The first half of presidential election years tend to be sluggish, followed by a big second half
Average return, 1/1/26 – 12/31/23

There’s no guarantee the market will follow the historic election year pattern in 2024. And, of course, elections have consequences for fiscal policy, which can affect financial markets. But we believe a combination of the Fed’s expected pivot and the U.S. economy’s positive momentum make a compelling rationale for investors to move out of large cash positions and tune out the political noise.

In short, don’t allow election uncertainty to obscure to what is historically a sweet spot for financial assets.

For more depth on how markets relate to election cycles, check out the full Student of the Market: Election Special deck.

Aaron Task contributed to this piece

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