Will Markets Turn Volatile During the 2024 U.S. Presidential Elections?

Looking at the market's performance during previous election years can help us see the impact of the 2024 election on the market. 

Key Takeaways

• Being the largest market in the world, whatever happens in the U.S. certainly affects the global market.
 

• So, to what degree does the 2024 U.S. Presidential election affect the markets?
 

• The 2024 election is going to be unpredictable, and we believe the market may turn volatile in the short term. 

“I think there will be a crash if I don’t win,” 

said former U.S. President Donald Trump and the Republican front-runner for the 2024 Presidential Elections in an interview a few days ago. The Former President’s remark was aimed at targeting those traders who are concerned about the impact of the 2024 elections on their portfolios.

Being the largest market in the world, whatever happens in the U.S. certainly affects the entire market. It is understandable that investors are worried about the performance of the market in the current election year. But there is a question: to what degree do the U.S. Presidential Elections affect the markets?

We decided to dig through the market performance during previous election years in the U.S. and tried to study the correlation if any. We also address the concerns you may have regarding the impact of the 2024 election on the markets. 

What Does Historical Data Say?

Looking at the performance of the market during previous elections years can be illustrative for us to see the impact of the 2024 election on the market. We decided to have a close look the performance of S&P 500—a stock market index tracking the performance of the largest 500 largest companies listed in the U.S.—throughout the previous election years.

Historical data from First Trust suggests that since 1928, S&P 500 recorded positive returns in 20 of the 24 election years (83%). The average return for the election years was 11.58%. For further clarity, we broke down the S&P 500 index’s performance during the tenures of the former U.S. Presidents year-wise and term-wise.

On and around election day, there is often some anxiety in the U.S. market about how a president’s 4-year term might affect the stock market.  Here, we look at the performance of the S&P 500 index each election cycle since 1928. Over the past 92 years, the index has witnessed positive performance 73% of the time. The index has averaged a yearly total return of 11.54%. 

 

Source: First Trust

• The S&P 500 Index has seen positive performance during 67 of the last 92 years.  

• The index has averaged a yearly total return of 11.54%.  

• The average total return for a 4-year term was 46.18%.

There is an interesting observation about the market performance party-wise too.

• When a Republican was in office, the average yearly total return was 7.85%.

• When a Democrat was in office, the average yearly total return was 14.93%.

We also observed some interesting patterns regarding the performance of the S&P 500 index during a 4-year election cycle:

• On average, the first year of a presidential term remains rather optimistic at 9.88%, with a decline in the second year at 8.47%.

• The third year of a term offered the best annual returns at 17.64%.

• It again fell to 10.19% in the fourth year.

There are many factors that impact stock market returns but one common concern of investors is how the stock market will be impacted by a change in the U.S. President. In past election years, the S&P 500 Index has seen more positive performance than negative. A closer look at the performance throughout the previous election years throws light on some interesting patterns.

• The index showed the best return (43.6%) in 1928 when Herbert Hoover (Rep.) was elected as the U.S. President in 1928.

• It showed the worst return in 2008 (37%) when Barack Obama (Dem.) was elected as the U.S. President in 2008.

However, making a direct relation between the election and the S&P 500 index’s performance would be incorrect. The bull market in 1928 was more sentiment-driven than based on any critical evaluation; the phenomenon led to the Wall Street Crash of 1929, the most devastating stock market crash in the history of the U.S. The economic conditions led to the Great Depression when the S&P 500 reflected a negative return of 45% in 1931.

2008 saw the next worst S&P 500 return of 37% but it had less to do with the Presidential Election and more to do with the Global Financial Crisis in the Wall Street. It led to the Great Recession to contain which bailouts worth billions of dollars were deployed by governments from across the world. Let's also examine the performance of the S&P 500 index in the first year of a four-year Presidential term. 

How did the Market Perform during President Biden’s Term?

As far as the current U.S. President Joe Biden is concerned, the market has performed as per its own nature and the President hasn’t made much difference. President Biden entered the White House in January 2021 in the wake of the economic crisis due to the lockdown restrictions imposed to combat COVID-19 pandemic. If we look at the performance of the S&P 500 index, it continued to rise as per its natural trajectory during 2021 as the market was recovering from losses at the time. The index nearly reached the mark of 4,800 points by the end of 2021.

But as 2022 began, the Fed initiated its policy of interest rate hikes to combat inflation. In response, the S&P 500 continued to falter through the most of 2022. Similarly, 2023 was a year of volatility for the index due to speculations surrounding the Fed’s decision to hike interest rates.

But once the Fed clarified that it wasn’t going to hike rates anymore, the market breathed a sigh of relief. Slowly, the S&P 500 began to rise and hit the-then all-time high (ATH) of 5,000 points in February 2024. Since then, it has consistently risen higher and higher. On 3 July, the index hit another record as it crossed above 5,500 points. In fact, it was the 32nd record high of 2024 for the index. The index has added $16 trillion (in market capitalisation) during the ongoing rally that began around the end of 2022.

The Federal Reserve under President Joe Biden has kept the key interest rates steady for the past few months in a targeted range of 5.25%-5.5% as it seeks to lower inflation to the target of 2%. However, other metrics don’t show relief. As per the U.S. Bureau of Economic Analysis, real gross domestic product (GDP) grew at an annual rate of 1.4% during the first quarter of 2024. In fact, the GDP growth rate has consistently declined for the last three quarters.

Source: Bureau of Economic Analysis

The market is still not the strongest, with inflation and unemployment being primary economic concerns of the voters. Whoever wins will enter the White House with a budget deficit of $1 trillion. So, the challenge before the next president is going to be exceptional. Most economists don’t think that there will be much difference between Biden and Trump when it comes to fiscal policy.

Will the 2024 U.S. Presidential Election Affect the Markets?

2024 is a year of elections for several democracies across the world. In South Korea, mid-term legislative election was held in April 2024 which saw an increase in the strength of the country’s liberal opposition and a humbling experience for the ruling conservatives, led by President Yoon Suk Yeol, who couldn’t secure a complete majority.

The India general election concluded the last month, with the incumbent right-wing BJP led by Prime Minister Narendra Modi return to power for the third time in a row but without a majority this time. The European Parliament election also concluded the last month that resulted in a victory for the right-wing.

The last month also witnessed the general election in Mexico where the left-wing party emerged victorious. This year, the main contenders for the country's presidency were women. The general election in the United Kingdom also concluded recently. The challenging Labour, led by Keir Starmer, defeated the incumbent Tories, led by PM Rishi Sunak.

The U.S. goes to the Presidential Election in November 2024.  The incumbent Joe Biden (Democratic Party) and the challenger Donald Trump (Republican Party) are engaged in presidential election debates ahead of the election to be held in November 2024.

Economic performance is one of the primary factors that voters look at when a country goes to elections. Every president tries their best to boost growth and contain inflation during at least two years before their re-election.  The 2024 election is going to be unpredictable, and the market may turn volatile in the short-term. Analysts are nonetheless hopeful of the market performance in 2024.

The elections certainly affect the markets. But there is an array of factors such as geo-political conditions, interest rates, inflation rates, foreign exchange rates, regulations etc. that affect the markets. Historically, the impact of the elections on the markets is rather short-term. It has also been observed that election outcomes have a minimal impact on the market performance in the medium- and long-term.

But the market is not fond of uncertainty around the time when election results are announced and an uncertainly often triggers panic in the market. Neither the Democrats nor the Republicans can prove themselves to be better in influencing the performance of the markets.

Politicians anyway get too much credit for the stability or the lack of it in the market. Nonetheless, the government is responsible for framing the monetary police, legislating financial laws and managing the economy. Such decisions indeed influence how the market functions but there are a number of factors at play.

A close look at the economic data for the past few decades suggests that the stock market has mostly recorded positive returns regardless of who rules the country. We can safely say that there will no major shift in the monetary policy of the U.S. regardless of whoever wins the election. The Federal Reserve operates rather independently without any pressure, at least as far as managing interest rates and inflation is concerned.

It is suggested that traders should closely observe the market during the election season but shouldn’t attribute disproportionately high importance to the elections. Opportunities for investing and retail trading will continue to move naturally irrespective of whoever wins the election.

Fun Fact: Donald Trump had remarked in 2020 that the stock market will crash if Joe Biden is elected as the President. Surprise, surprise! The Dow Jones Industrial Average closed above 37,000 for the first time ever in December 2023.

Frequently Asked Questions (FAQs)

1. Does the U.S. Presidential Elections affect the markets?

Being the largest market in the world, whatever happens in the U.S. affects the global market. Data illustrates that the U.S. Presidential Elections certainly affects the markets.

2. Does the market perform well or poorly during the election cycles in the U.S.?

Historical market data indicates that since 1928, the S&P 500 index recorded positive returns in 20 out of 24 election years. The average return for the election years was 11.58%.

3. During which election year did the S&P 500 perform best?

The S&P index reflected the best return (43.6%) in 1928 when Herbert Hoover from the Republican Party was elected as the U.S. President.

4. During which election year did the S&P 500 perform worst?

The S&P index reflected the worst return (37%) in 2008 Barack Obama from the Democratic Party was elected as the U.S. President.

5. Will the 2024 U.S. Presidential Election affect the markets?

A. Yes. The 2024 U.S. Presidential Election is going to be unpredictable, and the market may turn volatile in the short-term.

However, an election, even as significant as this one, is only one of the factors that affects the markets.