2024 is being called the year of the election as nearly 50% of the world’s population will vote, including major democracies like India, the United Kingdom, and the United States. Concerns arise among investors about the impact of elections on business and the stock market, fueled by media coverage implying a correlation between asset prices and election outcomes. However, historical data shows that election results have had little connection to stock market performance. Trump’s victory in 2016 and the disputed election in 2020 did not have the expected negative impact on the S&P 500, with the market performing differently than many analysts anticipated.
The average return of the S&P 500 index from 1928 to 2016 was 11.28%, indicating that overall market trends have a greater influence on asset prices than election results. Major market crashes in 2000 and 2008 were not attributed to elections or presidential policies, with market performance being affected by broader economic factors. The price-to-earnings ratios of stocks were already high during those periods, influencing stock prices more than political events. Andrew Van Sickle emphasized that presidents have little control over the economic factors that impact market performance, making elections a minimal factor in stock market movements.
Market reactions to major events like terrorism, wars, and pandemics have historically been short-lived, with markets recovering within a few months. The stock markets showed resilience during the Covid-19 pandemic, rebounding quickly despite the economic challenges. Brexit in the United Kingdom and the Russian-Ukrainian conflict also did not have long-term negative effects on stock markets, with many global markets hitting record highs post those events. While politics can impact markets in extreme cases, overall, the economy drives stock markets more than political events.
Investors are advised to stay calm during election years and unexpected events, diversifying their portfolios across various asset classes, including bonds, to minimize the impact of market fluctuations. Following Sir John Templeton’s advice that “this time is different” are the four most dangerous words in investing, highlights the importance of staying invested and diversified for long-term financial success. Consulting with licensed professionals for personalized financial advice is crucial, as the past may not always be a good guide to the future. Ultimately, maintaining a diversified portfolio and staying informed can help investors navigate market uncertainties and achieve their financial goals.
