A new report examines how stocks have fared in past election years and which sectors could benefit
A new report from Lincoln Financial Group has examined how the stock market has performed during past election years, probing the potential impact of the 2024 elections on stocks.
Lincoln’s Market Intel Exchange report, released this week, shows that presidential election years have not historically moved the needle any higher for stocks in general, but certain sectors could be impacted, depending on the outcome.
Market looking strong in 2024
So far, the stock market in this 2024 election year has performed better than average.
As of July 11, the S&P 500 has returned 17%; through the first half of the year, it jumped 14.5%. This is the second-best first half in an election year, behind only 1976 when the market was up 15.6%. The average first-half return in presidential election years is 7.9%.
Only four of the 24 presidential election years since 1928 have ended with the stock market in negative territory at year’s end, with three of them—1932, 2000, and 2008—coming during economic downturns.
The performance of stocks in the 2024 election year is also ahead of the 11.5% average return for the S&P 500 during presidential election years.
Historically, stocks have performed slightly below the norm in presidential election years. According to the report, the average annual return for the S&P 500 since 1928 is 11.9%, while the average annual return during non-election years is 12%, including dividends.
This tells us that presidential election years don’t really impact the broader stock market. While people care about politics, markets do not.
“It’s less about politics and more about the idiosyncrasies and the macro environment that influences market returns,” said Jayson Bronchetti, chief investment officer at Lincoln Financial.
However, the report noted that politics and policy agendas can impact individual sectors.
How politics could impact sectors
The economy and factors like inflation, gross domestic product, the labor market, and interest rates, to name a few, have historically had the biggest impacts on corporate earnings and stock market performance.
The Federal Reserve has never let politics impact its decisions—only once since 1980 did the Fed not change the federal funds rate in an election year. That was in 2012, when rates were at 0% to 0.25% as the nation was recovering from the global financial crisis.
However, the Lincoln Financial report does point out that sectors and stocks within them could be impacted by who wins the White House and Congress.
For instance, it argues that if the Democrats win the White House and control Congress, technology manufacturing, telecommunications, industrials, and renewable energy could benefit.
Similarly, the report speculates that, if there is a red wave and Republicans control the presidency and Congress, financials, defense, healthcare, and oil and gas should all benefit.
Tune out the noise
While these are broad assessments of how politics could impact sectors, they are only likely to occur under the control of a single party. If there is a split between Congress and the White House, compromise is more likely.
While it is important to understand how policy could impact elections, making portfolio changes based on these factors is not prudent.
“[A]ttempting to position portfolios around the political outlook for certain sectors isn’t likely to be a winning strategy, as party goals are not the only factor influencing company results,” the report said.
“Investors are better served tuning out the election noise and focusing on the long-term fundamental drivers of markets.”
However, one final piece of data to consider is how small-cap stocks have fared after election years.
In the six months following a presidential election, small caps have outperformed large caps, returning 11.5% to 8.4%. This disparity generally persists for 12 months after a presidential election.
Small-caps have severely lagged large-caps in recent years, so it is unclear if this trend will hold. However, as with all of the data in this report, it is meant to provide some insight for investing in the 2024 election.
However, any portfolio decisions should be based on sound research into the individual stocks and how the macro forces may impact them.
