What will happen to the stock market after the election?

[UNITED STATES] As the 2024 U.S. presidential election approaches, investors and analysts are closely watching how the stock market may respond to different potential outcomes. While historical trends provide some insights, the unique circumstances surrounding this election cycle make predictions challenging. This article explores the various factors that could influence market reactions and offers expert perspectives on what investors might expect.

Historical Trends and Market Performance

Historically, U.S. stock markets have shown resilience during election years. Since 1950, the S&P 500 has averaged returns of 9.1% in election years, according to research by Fidelity's Denise Chisholm. However, it's important to note that markets tend to rise over time regardless of election cycles.

"Looking at the historical data, it appears that while the 12 months preceding a presidential election have had the widest range of possible market outcomes relative to other parts of the election cycle, the average return isn't substantially better or worse," says Chisholm. "This points to the presidential election not being a notably 'market-moving' event."

Short-Term Volatility vs. Long-Term Fundamentals

While elections can create short-term market volatility, long-term market performance is typically driven by economic fundamentals rather than political outcomes. Jurrien Timmer, Fidelity's director of global macro, notes, "Elections tend to have less impact on the markets than politicians may like to believe."

That said, the unique circumstances of the 2024 election, including the ongoing economic recovery from the pandemic and heightened political polarization, could lead to increased market sensitivity.

Potential Market Reactions to Different Outcomes

Harris Victory Scenario

If Vice President Kamala Harris wins the presidency, the market reaction could be mixed. On one hand, continuity in policies might provide stability. On the other, concerns about potential tax increases and increased regulation could create some headwinds for certain sectors.

A victory for Harris might cause the stock market to reverse some of the upward momentum that has been seen over the past several weeks. This is because the possibility of greater taxes and additional regulations provides investors with a temporary reset of their expectations.

Trump Victory Scenario

A victory for former President Donald Trump might initially be viewed positively by some market participants, particularly those in sectors that benefited from his previous administration's policies. However, the potential for increased trade tensions and policy uncertainty could also introduce volatility.

A victory for Trump might also result in some brief market volatility as a result of the greater possibility of higher tariffs. Additionally, depending on the composition of Congress, it could open the door to increased debt and deficit spending, which would need to be evaluated against the possible advantages of reduced taxes and regulations.

Sector-Specific Impacts

Different sectors of the stock market may react differently based on the election outcome and anticipated policy changes:

Healthcare: A Harris victory might boost healthcare stocks if it's perceived as supporting the Affordable Care Act, while a Trump win could benefit private insurers and pharmaceutical companies.

Energy: Renewable energy stocks might see gains under a Harris administration, while traditional oil and gas companies could benefit from a Trump victory.

Technology: The tech sector could face increased scrutiny under either administration, but the nature of potential regulations might differ.

Financial Services: Banks and financial institutions might prefer a Trump victory due to expectations of lighter regulation.

The Role of Congress

It's crucial to remember that the president's ability to implement policies depends significantly on the composition of Congress. A divided government, where one party controls the White House and the other controls one or both chambers of Congress, could lead to gridlock and potentially less dramatic policy shifts.

"The biggest policy advancements occur when one party controls the White House and both houses of Congress," notes Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. "Based on polls, we're a long way from that scenario at this point."

Market Reaction to a Contested Election

One scenario that could lead to significant market volatility is a contested election result. If the outcome remains uncertain for an extended period, as occurred in 2000, markets might experience increased turbulence.

A disputed presidential election outcome that goes on for weeks into the future is likely to have a negative impact on the market for a short period of time. On the other hand, we would examine the dislocation and invest any surplus funds in investment vehicles like as stocks and bonds.

Global Market Implications

The U.S. election outcome can have ripple effects on global markets. International investors will be watching closely, as U.S. policy decisions on trade, foreign relations, and economic cooperation can impact markets worldwide.

Investor Strategies in Election Years

Given the potential for short-term volatility, financial advisors often recommend that investors maintain a long-term perspective and avoid making drastic portfolio changes based solely on election outcomes.

Emotional reactions to the election that divert one's attention away from a well-constructed investment strategy are a formula for derailing investing success. This is because the economy and stock market of the United States are likely to expand over time regardless of the makeup of Washington.

The Importance of Economic Fundamentals

While elections can create noise in the short term, economic fundamentals such as corporate earnings, interest rates, and overall economic growth tend to be more significant drivers of long-term market performance.

"The market today is more focused on corporate earnings and the potential for Fed interest rate cuts," says Rob Haworth. This suggests that investors should pay attention to these factors alongside election developments.

As the 2024 U.S. presidential election approaches, investors should prepare for potential market volatility while keeping their long-term investment goals in focus. While historical trends and expert analyses can provide some guidance, the unique circumstances of each election cycle make precise predictions challenging.

The stock market's reaction to the election outcome will likely be influenced by a complex interplay of factors, including the specific policies proposed by the winning candidate, the composition of Congress, and broader economic conditions. Investors would be wise to maintain diversified portfolios, stay informed about both political and economic developments, and consult with financial advisors to navigate any election-related market movements.

Ultimately, while elections can create short-term market fluctuations, long-term investment success is more likely to be determined by adherence to sound investment principles and a focus on fundamental economic factors rather than political outcomes alone.