Fisher Investments Reviews How the Presidential Election Affects the Outlook for Stocks

While there are some new faces in the mix, the implications for markets haven’t changed much. Political developments can influence markets, but political biases should typically be left out of investors’ decision making. In this article, we’ll take a closer look at how political bias can cloud investors’ view of the economy, why falling political uncertainty is often a tailwind for stocks and how the upcoming US presidential election results could affect the outlook for markets next year.

Political Biases and the Economy

As we’ve previously discussed, stocks don’t play political favorites. So investors who let political preferences interfere run the risk of making hasty decisions on incomplete information—a common blunder, in our view. Exhibit 1 shows one of the many ways investors’ political biases can cloud their judgment. When asked their view of the economy, investors were more likely to express optimism when their preferred political party occupied the presidency.

Interestingly, investors seem to change their minds quickly when the opposite party takes office. For example, economic expectations among Republican respondents plunged after President Joe Biden and President Barack Obama were elected and skyrocketed following President Donald Trump’s 2016 victory. Conversely, Democrats viewed President Trump’s term more negatively and looked favorably on their own candidate’s time in office.

Exhibit 1: Sentiment’s Sweet When Your Party’s in the Driver’s Seat

Source: FactSet, as of 8/1/2024. University of Michigan Survey of Consumers. Consumer Sentiment Index by Political Party, monthly 9/26/2006 – 7/31/2024. Missing observations input using most recent observed value, as specific question was not included in survey every month.

We think this phenomenon shows the pitfalls of political favoritism. Different administrations’ policies can certainly affect the economy but are rarely large enough to affect broader macroeconomic forces. For example, in the 14 quarters of President Joe Biden’s term, US GDP growth has averaged 2.9% annualized. For the full 16 quarters of President Donald Trump’s time in office, GDP grew at a similar 2.4%.^[i] The economy expanded nicely under both presidents.

We may never see the day where peacocking candidates on the campaign trail don’t try to win votes by pointing to the economy. However, in our view, boiling the economy down to who sits in the oval office drastically over-simplifies complex global trends that extend far beyond the grasp of any politician.

The Secret of the 4th Year…

Regardless of the presidential election winner’s party, markets tend to reactive positively in an election year. This underappreciated truth is demonstrated in Exhibit 2 below, which shows how stocks have historically performed in various election scenarios. In most outcomes, stocks achieved better than average historical returns, regardless of a party flipping or retaining the presidency.

Exhibit 2: Average Returns By Election Outcomes

Source: Global Financial Data as of, 8/15/2024. S&P 500 Total Return Index average cumulative returns during all presidential election years categorized as indicated, monthly, 12/31/1928 – 12/31/2023.

Additionally, the back half of election year returns tend to be more positive than the first half. We think this is, in part, thanks to falling uncertainty as the election nears. Candidates are eventually elected, the potential impact of the results are further weighed (and priced) and markets move on quickly—typically delivering positive returns post-election.

The Perverse Inverse

Though stocks generally don’t prefer one party over the other, the outcome of this year’s elections could have some interesting implications for 2025. Ken Fisher, Founder, Executive Chairman and Co-Chief Investment Officer of Fisher Investments, termed a market phenomenon he calls the “perverse inverse”, which describes the tendency for inaugural years to behave differently than election years depending on which party wins.

Exhibit 3 shows this dynamic. Typically, election year returns are stronger when Republican presidents are elected—consistent with the (misguided, in our view) perception that Republicans are more business-friendly. However, when markets realize the candidate can’t get as much done as they hoped, it’s historically been a headwind for returns in inaugural years. Conversely, investors may fear a perceived less business-friendly environment if a Democrat wins and are similarly relieved when the candidate can’t do as much as feared.

Exhibit 3: The Perverse Inverse

Source: Global Financial Data, as of 1/5/2024. S&P 500 Total Return Index average cumulative returns by presidential election year, 1925 – 2021.

It's too early to know for certain who will win come November. The “perverse inverse” may hold true this time, or it may not. Much will hinge on the composition of Congress—which will reveal how difficult it will be for the victor to legislate or not—as well as broader trends in the global economy. While surprises are possible, the balance of power seem unlikely to tilt too far in either direction, which should maintain the status-quo political gridlock stocks enjoy. Moreover, we think the important thing to note is that markets tend to be nicely positive over this two-year period, regardless of which party wins. That, against a resilient global economic backdrop and pragmatic investor sentiment, should support stocks in the period ahead.

Want to Dig Deeper?

In this article, we discussed how the 2024 US presidential election could impact markets. For Ken Fisher’s analysis on the upcoming election, read his New York Post column, “How will this ‘wacky’ 2024 election impact stocks? Maybe not how you think.”

During election cycles, presidential candidates from both parties make big policy proposals that can scare investors. For a closer look at why campaign pledges often don’t become actual law, you can also read Fisher Investments’ recent MarketMinder article, “Election Update: The Grain of Salt Needed for Democratic Convention Promises.”