For Investors, No Need to Debate 2024 Yet

Editors’ Note: MarketMinder prefers neither political party nor any candidate. We assess developments for their potential economic and market impact only.

It has begun. With the first GOP primary debate in the books, we are officially off to the races for 2024’s presidential election. And we suspect that, for all those who watched with rapt attention, notepads and popcorn in hand, an equal or greater number’s reaction to the news was akin to, noooo this is still too early don’t make it start yet. To both camps, we get it. Being in tune with policy proposals is important for voters who will participate in the primary and have a choice to make. Yet these circuses are also tiring, and when they start well over a year ahead of the election, it is a lot. So here is an important reminder for everyone: For all the sociological importance of this or any national election, it is far too early for investors to start dwelling on the contest and its market impact, a practice that is fraught with bias anyway.

Not that we don’t get the temptation, what with candidates’ economic policy proposals starting to grab the spotlight. Former President Donald Trump is the prime example, with his proposed uniform 10% border tax on all imports hogging headlines globally. Some cheer the alleged benefit for American factories. Others (rightly, in our view) explain the deleterious impact of a 10% price hike—especially on the heels of 2022’s inflation—which would apply not just to final goods but to parts and resources, hitting made-in-the-USA goods hard. Those goods would also see their competition hamstrung, giving even 100% US-made goods, to the extent they exist, less reason to compete on price.

Yet going further than thinking through the pros and downstream consequences of any proposal is very much putting the cart before the horse at this juncture. Markets move on probabilities, not possibilities, and it is simply impossible to determine the likelihood of any economic policy proposal becoming law. Many of them depend on some or all of the following, in no set order: the candidate who proposes them becoming president; said candidate sticking with said proposals; said candidate having a Congressional majority; said majority not being beset by intraparty gridlock; and other issues not taking priority.

Right now, there isn’t any way to know who will win the nomination on both sides, never mind which of those final candidates will win in the Electoral College 14 and a half months from now. Congressional races haven’t even begun to take shape yet. And we have no idea how either party will coalesce around their eventual nominee. Anyone who says otherwise is just throwing spaghetti at the wall.

The time for investors to consider the election’s implications will come. But when it does, it won’t hinge on the candidates’ personalities and attitudes, and preset biases about which party is better for stocks have been classically undercut on both sides. In our view, investors need to get beyond those factors and weigh simple things, like which party has a higher probability of claiming the White House, whether they have a likelihood of a strong Congressional majority, and how those factors square with investors’ prevailing hopes and fears.

We know from history that new Republican presidents tend to fuel big hopes with market-friendly rhetoric, driving above-average election year returns, but disappoint in their first year as they prove to be just a politician, driving weaker returns in year one. We also know from history that while new Democratic presidents tend to generate the opposite—fear in the election year and relief when they, too, are just a politician with no follow through—also due to rhetoric. And we know re-elected Democrats tend not to drive this same pattern, as familiarity breeds content. But we can’t know which is more likely until the general election begins to unfold.

In the meantime, we think politics point positively. Years three and four of the presidential cycle are stronger than years one and two, with both historically delivering S&P 500 returns above the annualized average since 1925. Returns in year three tend to be front-end loaded—powered by big tailwinds from midterms increasing gridlock the prior year—but they are still typically fine overall in the year’s second half. Year four, too, tends to be positive much more often than not, with the S&P 500 delivering an average 11.4% return and rising 83.3% of the time since 1926.^[i]

So if you enjoy watching these early verbal sparring matches, go on, have your fun! And if you would much rather spend time on family, friends and hobbies and ignore the lot of them for a while longer, you have your fun too! Giving serious thought to the election’s outcome and any related potential market impact can wait till next year.