Here's some good news for investors worried about the highly contentious 2024 U.S. presidential election: History shows that stocks tend to rally in the year leading up to Election Day.
But there's a problem, noted Saira Malik, chief investment officer at Nuveen, which manages $1.2 trillion in assets: While the S&P 500 SPX averaged about 10% total returns during presidential election years, based on data , which date back to 1928, the large-cap benchmark had already gained significantly more between the beginning of November and the end of last year.
In other words, these primary election gains may have already been achieved.
“That's an interesting statistic and one of the many reasons we're a little more worried about stocks coming into early 2024,” Malik told MarketWatch in a phone interview.
Nuveen
Those other reasons include the tendency for markets to be more volatile in election years, as well as concerns that investors are still pricing in more interest rate cuts than the Federal Reserve is likely to impose, Malik said. Additionally, stocks are expensive, with the S&P 500 trading at a premium of about 20% to its average valuation since 2010, she noted.
Investors also know that the 2024 election is likely to be highly contentious. Donald Trump enters Tuesday's Republican primary as the clear front-runner for his party's nomination as he seeks a rematch with President Joe Biden in November.
Washington Watch: New Hampshire GOP primary: Haley tries to turn the tide as Trump heads for the 2024 nomination
Trump is running his campaign amid numerous legal problems. Trump is facing election interference charges in Washington, D.C., and Georgia's Fulton County, and was indicted last year in a hush-money case and a confidential documents case. He denied wrongdoing and argued the prosecution was politically motivated, while repeating false claims about his 2020 election defeat.
Biden faces low approval ratings, including within his own party. An ABC News poll this week found that 57% of Democrats and Democratic-leaning independents would be happy with a Biden nomination, while 72% of Republican-leaning adults would be happy with Trump as their party's nominee.
Meanwhile, concerns about political dysfunction in the US are growing. Last year's debate over the U.S. debt ceiling and the subsequent ouster of Kevin McCarthy as House Speaker underscored concerns among some investors that confidence in U.S. institutions and governance was beginning to wane.
See: What U.S. political dysfunction means for the stock market and investors
As the election approaches, the political environment could become more controversial, which could lead to higher market volatility. A disputed election result could add to this volatility, Malik said.
Presidential election years also mean that investors should be prepared for an avalanche of charts and tables analyzing historical market performance surrounding the quadrennial event.
John Lynch, chief investment officer at Comerica Wealth Management, acknowledged the “risk of a curse” and highlighted the following statement, which shows that stocks have never posted an annual decline when a sitting president – win or lose – ran for re-election. This includes 2020, when stocks suffered a crash in February-March triggered by the outbreak of the COVID-19 pandemic, but soon recovered and posted an annual profit.
Strategas research partner
Since 1952, the index has only fallen three times in an election year – 1960, 2000 and 2008. All three years were “open” election years with no incumbent running for re-election, Lynch noted.
Nevertheless, the development of the market, to the extent that it reflects the economy, can also provide information about a candidate's prospects. Lynch found that every president who managed to avoid a recession in the two years before his reelection won a second term, while every president who experienced a recession during that period ended up losing.
He noted that stocks typically outperform in presidential election years when the incumbent wins. Finally, a strong economy and market likely means voter sentiment is behind the incumbent president.
The pattern in years when incumbents lose tends to involve two selloffs, one at the height of the primary season in the spring and another after the party conventions in late summer.
This means that the stock market appears to have strong predictive power, said Lynch.
In 24 presidential elections since 1928, the direction of the index has made the election outcome clear, Lynch said, citing data from Strategas. If the S&P 500 was positive in the three months before the election, the incumbent or the candidate of the incumbent's party won. In the four cases where the indicator was wrong, the index increased, but the incumbent party candidate still lost.
U.S. stocks staged a strong rally in 2023, consistent with the so-called presidential cycle, which typically sees solid gains in the third year of a president's term. Stock markets consolidated at the start of the new year, but ended last week on a strong note, with the S&P 500 posting its first record close in more than two years.
See: According to history, here's what could happen after the S&P 500 hits a new record high
The Dow Jones Industrial Average DJIA also posted a record close, rising 0.7% for the week, while the Nasdaq Composite COMP posted a weekly gain of 2.3% as technology stocks reasserted their lead.
The strong technology performance, meanwhile, may reflect concerns about consumer staying power, Nuveen's Malik said. The company believes the combination of cyclical risk and politically motivated volatility provides grounds for defense.
This includes focusing on stocks of dividend growth companies – companies that have consistently increased their dividends over time – as well as global infrastructure companies that will continue to benefit from trends in reshoring, nearshoring and other changes in supply chains.
Dividend growth and global infrastructure stocks have weathered markets relatively well in the past, Malik said, highlighting Nuveen's concerns about the possibility of a pullback after the “remarkably strong” equity rally in the final two months of 2023.