Look Past the Debate

The first presidential debate is in the books, and we aren’t going to pile on. Not on either side. And there is a simple reason for this, beyond our steadfast political neutrality: Stocks don’t pick sides. They are party blind, and regardless of who wins, the tailwind of falling political uncertainty seems to be gathering.

We know ours is a rare take. With all the buzzing over potential backroom handwringing and perhaps even a candidate swap, things look chaotic. Uncertain. But that is the point. Election years always start with uncertainty, which can weigh on sentiment. But it melts away as the nominees become clear and the general election race comes into focus. Eventually we get a winner, and as markets price this in, sentiment usually rallies around the victor regardless of party. Markets just like having the clarity that comes with knowing the outcome.

It is tempting to cast the debate and its potential implications as a wildcard. Yet all elections bring wildcards big or small. Plenty of bull market election years have had the proverbial “October surprise.” Early frontrunners have fallen. Third-party candidates have muddied the waters. Talk of a contested convention isn’t new, either.

So in full context, we are hard-pressed to see that much truly changed Thursday. After all, dissatisfaction with these candidates and discussion of President Biden’s age has been running all year. And, for all the talk of a change, taking the baton this late in the race is a tall order. Then, too, Biden’s speech in North Carolina Friday suggests he has no intention of leaving voluntarily.

Regardless, even if we do get a new name on the ticket, we are still looking at a tight race that comes down to a handful of swing states. Hence, the race still hinges on technicalities like campaign strategy, grassroots machinery and turnout.

These are unknowns, but they will become known. State- and county-level polls will come into focus. We will see which campaign gets more ads on TV in battleground areas and how effective their reach is. If there is a drop-in candidate, America will get to know him or her, and the party machineries will roll on, doing their thing. Society’s opinions of both current candidates—and both parties—are pretty hardened. But markets will get a bead on which side inspires more enthusiasm and, therefore, likely turnout.

True, markets don’t like rising uncertainty. But they love falling uncertainty, and that is what we will get as 2024’s second half unfolds. Not only will markets pre-price the presidential outcome, but they will see how Congress shakes out and how much power the presidential winner will have. Clarity will come on all fronts.

This isn’t unique to 2024—it happens every election year, which is why the vast majority are positive, with back-end loaded returns. As Exhibit 1 shows, year four has the second-best average return and second-highest frequency of positive returns of the four-year electoral cycle. And the good times come regardless of the winner’s party.

Exhibit 1: Presidential Term Anomaly

Source: Global Financial Data, Inc., as of 1/10/2024. S&P 500 total returns.

Now, most of the time, gains come late—as that uncertainty falls. But this year started off with relatively less uncertainty than usual, with two known candidates and a primary process that was little more than a formality. We suspect this is one reason for the unusually strong start for election-year returns. But given how much room there still is for uncertainty to fall from here, there should be plenty of gas left in the market’s tank.

And there is nothing about a good first half that points to weakness later. Quite the contrary. Election year first halves have posted 10% or greater gains eight times since 1928.^[i] The second half was also positive seven times.

As this year progresses, we will gain clarity on who is set to be the next president, how the next Congress looks and what the likelihood of big legislation is. As that gradually happens, the falling uncertainty should lift markets.