4 Market Trends in Election Years — And What To Do About Them
Written by
Yaël Bizouati-Kennedy
Edited by
Cory Dudak
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With an election cycle that seems full of continuous surprises, some investors might be anxious about their investments and what to do about them. Experts note, however, that there are a few market trends that can happen during election years, some of which could serve as guidance to navigate these sometimes turbulent and uncertain times.
Increased Volatility
Several experts noted that one market trend that often occurs during election years is increased volatility, which is due to uncertainty and potential policy changes that come with a new administration.
In turn, Michael Collins, CFA, founder, CEO, WinCap Financial, said that investors should be prepared for this volatility by diversifying their portfolios and having a long-term investment strategy in place.
Some experts are even more time-specific, saying that that volatility tends to rise one to three months ahead of presidential elections in November.
“While this could pose a risk in the near term, we would note that the S&P 500 usually posts positive (+16%) returns in the year following a presidential election, regardless of what party controls the White House,” said Peter Repetto, vice president and investment strategist at iCapital.
Outperformance of Certain Sectors
Another trend, Collins said, is the performance of certain industries or sectors, depending on the candidates’ proposed policies.
For example, if a candidate is advocating for increased spending on infrastructure, the construction industry may see a boost while renewable energy companies may benefit from a candidate’s focus on green initiatives, he said.
“Investors should research and consider how different policies could impact specific industries and sectors when making investment decisions,” said Collins, adding that historically, markets tend to perform well in the year leading up to an election but may experience a decline afterward as the new administration’s policies take effect.
“To fully harness this potential for gains, investors should stay informed and monitor market trends closely but also be prepared for potential dips following the election,” he added.
Be Wary of Certain Sectors
Now, while some sectors tend to do well in election years, others can be trickier to navigate.
Technology stocks, for example, are likely to face pressure due to their growing market power and reach, said Peter C. Earle, senior economist, American Institute for Economic Research.
According to Earle, in an environment characterized by growing political acrimony, firms surpassing $1 trillion in market capitalization are becoming potential targets for antitrust and other regulatory actions.
In addition, he said that healthcare and energy sectors also face difficulties.
“Political debates frequently spotlight medical costs, insurance practices, and oil and gasoline prices, making these stocks particularly volatile during election years,” added Earle, noting that housing-related sectors are similarly at risk, given the affordability crisis exacerbated by rising mortgage rates and inflation’s impact on household budgets.
“In contrast, sectors benefiting from government spending, such as the military-industrial complex and government contractors, are likely to continue receiving substantial, if not increased, funding,” he said.
Historically Good for Equities
Finally, despite all the uncertainties leading up to the election, the calendar year in which a presidential election has been held has been a very good one for equity investors, explained Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University.
Historically, since 1926, the second half of a U.S. president’s term in office has seen markedly higher returns in the S&P 500 than the first half.
And while the third year of a president’s term has seen the highest returns (17.45%) , the second best year has been the year of the election — 11.57% on average with positive returns in 20 of the 24 years, said Johnson.
He also underscored the fact that investors trying to “outfox the market, by selling equities in advance of a presidential election have historically been disappointed.
“Bottom line is that investors should not change course with a major election coming up. But as indicated above, there does exist a presidential term effect and returns have been historically highest in the year of a presidential election,” he said.
Gold as a Hedge in Contentious Election Years
Alex Ebkarian, COO and co-founder, Allegiance Gold, said that historically, gold serves as a hedge against uncertainty in contentious presidential election years, such as Bush v. Gore in 2000.
“Starting with the year leading up to Bush’s presidency and during his first two years in office, gold rose 11% due to the dot-com bubble burst, 9/11 and stock market volatility,” he said.
In addition, in the year leading up to President Barack Obama’s presidency, uncertainty triggered gold to rise 25%, he added.
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