In the past, uncertainty during election years contributed to higher levels of volatility compared to other periods in the market. Surprisingly, one may have expected to see more volatility and potentially below average returns in financial markets this year, as 65% of global GDP will be impacted by one primary election or another. But so far in 2024, stock markets have performed well, and bonds likewise as interest rates have declined. In fact, the S&P500 Index recorded its best nine-month start to a presidential election year, and global equities, including Canada, have also generated fair returns.

So, what gives? Well, there are many forces at work that determine the short-term ups and downs of the market. It’s a highly complex, forward-looking adaptive system influenced by a wide variety of factors (e.g., interest rates, inflation, monetary policy, demographics, unemployment, warfare, trade, geopolitics, and election outcomes) all of which impact market returns and risk. As such, trying to accurately predict the future—and the ensuing effect on the stock market—is simply something that can’t be done with any statistically significant success. It's important to remember to avoid adjusting your portfolios on short-term, predicted outcomes.

However, we understand that it can be difficult to turn off the political noise and remain focused on your financial goals. Let’s face it, the U.S. is the world’s leading superpower and largest financial power, and its politics are difficult to ignore, especially for Canadians, given our geographic proximity, dependency on trade, and substantial investment exposure. The twists and turns of election campaigns and the associated drama can create short-term uncertainty and even an emotional response. But these are only risks to your portfolio if you act on them.

The good news is you don’t need to listen to the pollsters when it comes to preparing your portfolio for election outcomes. In this article, we show that the stock market, over the long term, generally advances no matter who is in the White House. And it’s those boring, time-tested investment management techniques of diversification and time in the market that can ensure your wealth continues to grow without being subjected to undue risk.

An Apparent Disconnect Between Politics and Financial Market Returns

In addition to important social and governance issues, the economy, healthcare, foreign, and fiscal policy tend to be some of the most hotly contested platform subjects. Candidates from both parties have already laid out their plans for spending related to healthcare, social security, defense and, in some cases, regulatory priorities for the energy, technology, and financial services sectors. How might the stock market react to one versus another is a question on the minds of many investors.

In Chart 1, we look back at the most recent six presidential terms and show the accompanying compound annual growth rate for the U.S. stock market and different industries, including Energy, Defense, Health Care, Technology and Financials (Banks, Brokers, and Insurers). While the sample size is not extensive, we find little evidence of a signal coming from presidential priorities/policies and how to sort out the potential winning and losing industries over that presidential term.

For instance, under both President Obama and President Trump, the top and bottom performing industries were almost identical despite different priorities and implemented policy and regulatory reforms. Similarly, during the Biden administration’s term, the Energy sector has been the top performing sector to the end of September 2024, despite a less energy friendly approach compared to his predecessor. Another take-away for investors from Chart 1 is the top and bottom performing industries were inconsistent from one four-year presidential term to the next, even during a second term. This reinforces the often boring but effective principle of remaining diversified.

To that end, diversification across different regions and asset classes is most important to ensure your portfolio remains resilient through the inevitable ups and downs of market cycles. In Chart 2, we show compound annual growth rates for various asset classes under the previous eight U.S. presidents from 1993 to 2024. Both charts paint a similar picture in that absolute and relative asset class returns changed from one four-year cycle to the next, and often returns were unrelated to any stated presidential priorities and policies.

When we look at past returns across different asset classes and sectors, what was feared or cheered during the campaign trail, rarely worked out as an investment thesis even a few years out. For example, despite being considered bad for small businesses and the banks by his opponents, during Obama’s terms in office, the financial sector, as well as U.S. small and mid-cap stocks—two decent proxies for small businesses—were amongst the top performers. And likewise, during the Trump years, emerging markets fared well despite his priority for “America first” when it came to foreign trade.

The key take-aways is to be diversified across sectors, asset classes, and regions which tend to be driven by a multitude of varying, underlying forces over time, including politics to different degrees of extent.

One other consideration is to see how the U.S. stock market reacted to different combinations of U.S. federal governments over the last 90 years.

As shown in Chart 3, there has been minimal variability to annual total returns across the different combinations of unified or split executive and legislative branches. In other words, you don’t have to guess how the underlying make-up of the federal government may or may not impact returns in the U.S. stock market. Companies, industries and the overall market will adapt over time.

Being Prepared For Any Post-Election Noise

It is possible that over the coming weeks there will be additional noise associated with the certification of votes, potential posing legal challenges by either side as well as societal unrest. We believe the noise will settle out as a winner is eventually determined. Here are some considerations for helping you prepare for any post-election noise that may come.  

Expect the unexpected

Over the coming weeks, or perhaps months, as votes are potentially disputed, uncertainty levels in the market may rise. It is important to try and avoid the likely pessimistic tone in the media whereby investors tend to react by taking actions such as market timing, i.e., de-risk the portfolio by selling stocks and moving into cash. Historically this has been a fatal mistake for investor wealth plans as the compounding effect of investing in stocks is disrupted, which over time can result in a material shortfall to financial goals. Remember, getting out of the market and moving into cash requires two correct timing decisions—getting out, and then getting back in. The odds of correctly making both decisions are very low. While the short-term emotional response to unpredictable markets may be to run and hide, the long-term investor does not. They remain invested and understand the market value of a portfolio will decline at some point, but it should eventually recover over the long term if they remained invested.

Remembering it’s very difficult to make predictions

The pollsters and pundits often get it wrong, and predictions of legal challenges and disputes could abound in the coming weeks. Keep perspective knowing that a few weeks or months is a very short time horizon and that sound investment decisions should be guided by  longer-term fundamentals. Wealth-creating companies with strong competitive advantages that offer valuable products and services should persevere and endure through periods of volatility—and often will do so irrespective of who’s in the White House.

Diversification remains the best approach to reduce election-driven risk

When we believe we have no edge in accurately predicting a short-term, future event, we opt to diversify—as making one-way bets is not an advisable strategy.

For us, diversification means thinking probabilistically—we plan for a wide range of potential outcomes. As a result, we often hold assets that should perform differently depending on what future scenarios unfold. With this approach, we can better position our portfolios for resiliency over the long-term. We think of it as trying to be in two places at the same time. In addition, we manage risk by identifying any sharp edges in portfolios, i.e., points of stress concentration that could break when times become difficult. For example, this could be avoiding or minimizing an allocation to a company that is highly impacted by one specific election outcome.

Time/perspective matter as well

Looking beyond the next few weeks and months, keep in mind that the short-term volatility before and just after an election has not deterred long-term gains in the stock market, provided you remain invested. Your investment portfolio should already be prepared for the eventualities of market volatility and be strategically positioned to generate a return and risk profile that is commensurate with the objectives set out in your wealth plan.