Are you anxious about the upcoming 2024 election and how it might impact your investments? You’re not alone. Many people feel the same, especially as elections are often associated with uncertainty, making us question the stability of the market and our financial future.

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Here, we’ll explore how presidential elections have historically affected the stock market, what trends you can look for in 2024, and practical strategies to manage your finances amid all the noise. Let’s break it down.

Why Are Elections So Stressful?

Presidential elections are like emotional rollercoasters for many Americans. In 2016, about half of U.S. residents said they felt stressed about the elections. By 2020, that number grew to more than two-thirds, and this stress wasn't only about who wins the White House. It was also about how the results might impact finances, including our stock portfolios. For 2024, around half of Americans are worried about their investments during the election year. But are these concerns valid?

The uncertainty of elections makes things worse. We don’t know how the outcome will unfold, and that unknown often prompts us to imagine the worst-case scenario, which can lead to unnecessary panic. Let’s bring some clarity with five key trends about the stock market and presidential elections.

5 Fascinating Trends About the Stock Market During Election Years

Check out these 5 trends.

1. Most Election Years See Positive Returns

Despite the uncertainty, data shows that in 82% of presidential election years over the last century, the stock market has posted positive returns. This means that only 18% of those years had negative outcomes for the market. Elections can create turbulence, but historically, the overall market tends to rise.

2. Year Three of a Presidential Term Often Sees the Strongest Performance

Interestingly, the third year of a presidency is often associated with the best market performance. This pattern might be because legislation from earlier years gets implemented, or because the sitting president starts setting the stage for re-election. History shows that roughly 91% of the time, the third year brings positive returns.

3. Returns Are Generally Higher With Republican Presidents

Historically, stock returns have been higher when Republicans are in office compared to Democrats. However, it’s crucial to note that positive returns happen regardless of which party controls the presidency. Markets usually prefer divided government, as it often prevents either party from making drastic policy changes, thereby reducing the risk of sudden economic shifts.

4. The Economy Continues to Grow, Regardless of Political Party

The U.S. economy has grown regardless of whether a Republican or Democrat is in the White House. Despite the political tensions and shifts, the U.S. has seen consistent economic growth for the past century. It’s proof that while elections may stir up short-term uncertainty, the long-term trend points to growth.

5. No Guarantees in Elections or Markets

Although trends and statistics are helpful, it’s important to remember that nothing is set in stone. Many complex factors—ranging from inflation and global events to domestic unrest—impact both election outcomes and market behavior. There are no guarantees, and it’s vital to approach election-year investments with a level head.

How to Make Better Financial Choices During an Election Year

The uncertainty around elections can make it tempting to react—maybe even overreact—when it comes to your financial decisions. But taking a step back and looking at the big picture is often the best move. Here are a few strategies to help you navigate your finances during an election year.

Don’t Make Decisions When You’re Stressed

Election years can trigger something called "election stress disorder," leading to anxiety and hypervigilance. If you’re feeling overwhelmed, it’s crucial not to let emotions guide your financial choices. Pulling out of the market in a panic can lead to missed opportunities when things stabilize. Instead, keep your long-term strategy in focus and resist making drastic changes based on fear.

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Stay Invested

Historically, markets tend to recover even if they face turbulence during elections. Making changes to your investments because of short-term market declines could do more harm than good. The data suggests that the stock market often yields positive returns over time, so it’s usually wise to stick with your well-planned investment strategy.

Look at Sectors That Perform Well

If you’re comfortable with some risk, consider sectors that have historically performed well during election years. According to historical data, sectors like financial services and energy have been top performers during past elections. Increasing allocation in these sectors might offer opportunities, but remember: past performance isn’t a guarantee of future returns.

Work With a Financial Professional

Navigating elections can be stressful, but you don’t have to do it alone. A financial professional can provide you with the insight and expertise needed to make informed choices without being influenced by the drama of the election. They can help you focus on your personal goals rather than letting political events dictate your financial decisions.

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Why Uncertainty Triggers Emotional Reaction and How to Manage Them

Uncertainty makes us feel confused and anxious. This often leads us to take actions—sometimes irrational ones—just to regain some sense of control. Here are three common reactions and how to avoid falling into these traps:

Holding Cash Instead of Investing

Many people hold cash during elections because they think it’s safer to avoid the markets altogether. While it feels secure, this choice often leads to missing out on gains when markets rally. The key is to remain invested while considering your risk tolerance.

Timing the Market

Election-related events can tempt people to make real-time adjustments to their portfolios. However, trying to time the market is inherently risky and often results in losing rather than gaining. Instead, maintain a steady course based on your financial plan.

Either/Or Thinking

Elections often push us into black-and-white thinking—believing that one candidate’s win will be catastrophic while the other’s is the best-case scenario. This can lead to poor decisions, like pulling out of investments in anticipation of a loss. Historically, markets recover regardless of who wins, so it’s best to avoid knee-jerk reactions.

Staying Calm and Invested: A Practical Plan

To navigate an election year successfully, try focusing on what you can control and leverage the following tips:

• Construct a Financial Fortress
  This involves ensuring that your investments align with your risk preferences and goals. Review your portfolio regularly and ensure you’re comfortable with your holdings. This will help you stay the course during times of market volatility.

• Prioritize Tax Efficiency
  Regardless of who wins, taxes are likely to rise. Look for opportunities to improve tax efficiency in your investments and across your financial plan. Consider strategies like tax-loss harvesting to reduce what you owe.

• Stay Focused on Personal Goals
  Revisit your goals, such as saving for a home or planning a trip, and keep your eyes on those objectives. Election years come and go, but your goals are what matter most. Having a clear focus can help you avoid making emotional investment decisions.

• Lean on Trusted People
  Talk with your financial advisor and trusted family members. Gaining different perspectives can help you stay grounded and avoid acting on impulse.

Election Year Outlook for 2024

The 2024 presidential election has been full of unexpected developments, from President Biden opting out of re-election to dramatic events around other major candidates. Historically, markets tend to be volatile leading up to an election but often gain stability afterward, especially when the government remains divided, limiting extreme changes.

Since 1952, the S&P 500 has averaged a 7% gain during election years, a figure below the long-term average but still positive. Analysts are cautiously optimistic about 2024, projecting a potential 12% upside for the S&P 500 in the year ahead. While pre-election uncertainty can lead to market weakness, history tells us that markets often stabilize once the election concludes.

Bottom Line

The 2024 election might bring uncertainty, but history shows that markets tend to adapt and grow, regardless of who wins. Instead of reacting to every piece of news or political drama, focus on your long-term strategy, manage your emotions, and rely on the expertise of financial professionals.

Elections are temporary, but your investment strategy is for the long run. Keep your eye on your goals, stay invested, and remember: the market's history of resilience is on your side.

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Reference:

J.P. Morgan. (n.d.). 2024 elections: 3 thoughts on the year ahead. Retrieved from https://www.jpmorgan.com/insights/outlook/market-outlook/2024-elections-3-thoughts-on-the-year-ahead

U.S. Bank. (n.d.). How presidential elections affect the stock market. Retrieved from https://www.usbank.com/investing/financial-perspectives/market-news/how-presidential-elections-affect-the-stock-market.html

U.S. News & World Report. (n.d.). Election 2024: How stocks perform in election years. Retrieved from https://money.usnews.com/investing/articles/election-2024-how-stocks-perform-in-election-years