Investors are reminded that markets are forward-looking, and current events have less influence on market returns than perceived future events. The main uncertainty looming over markets in 2024 is the rate of inflation and its impact on the Federal Reserve’s interest rate policy. Other events, such as geopolitical conflicts, have arisen, but the key question affecting stocks and bonds is whether the Fed will cut rates. Another event that could bring uncertainty-induced volatility is the 2024 Presidential Election.
The upcoming election is somewhat less of a mystery compared to prior years, as the candidates are already decided. Polling indicates a potentially close race, with uncertainty surrounding whether the loser will concede. It may be tempting for investors to shift to risk-off assets leading up to November, especially with short-term Treasuries yielding above 5%. Looking at historical data, the fourth year of the Presidential cycle has typically been positive for markets, with a tendency for a pullback in the final year of a President’s term.
Research has shown that Democratic Presidents have historically enjoyed better market returns compared to Republican Presidents. However, outside factors can greatly influence market performance, and there is a large degree of luck involved in determining economic outcomes. The ideal outcome for investors looking ahead to November may be a bit of gridlock, where a Democrat is elected president, but Congress is at least partially controlled by Republicans.
For those concerned about the political dysfunction in Washington D.C., the upcoming election season may seem like a crisis threatening the economy and financial markets. However, historical data suggests that presidential elections typically have less causal effect on market returns and more of a coincidental impact. Investors are advised to focus on other uncertain variables rather than getting caught up in the political ads and rhetoric leading up to the election.
