Elections & markets: Conventional wisdom often wrong 

Summary

Elections matter—other factors matter more. It is an election year—a period in which investor emotions typically run high. Questions regarding how the election outcome will impact financial markets will likely only increase as we move deeper into the year.

Elections play a role and can add to market volatility; however, an objective review of the historical data indicates that Washington’s perceived influence on market returns may be overstated and should not be viewed in isolation.

Indeed, the business cycle matters, monetary policy matters, valuations matter, earnings matter, global policy and geopolitics also influence returns, as do other factors.

• Importantly, markets have shown positive returns under a wide range of partisan control scenarios in Washington.
• For example, despite significant differences in policy agendas, the S&P 500 has posted very similar returns under the past three presidents—ranging from 12% to 15% annualized.
• Back in 2020, during a very heated election, we made a very similar argument. Our point of view then was the path of COVID-19 and the economy would likely have a greater impact on markets over the coming year(s).
• Notably, on November 9, 2020, a few days after the election, Pfizer showed evidence that its vaccine was 90% effective in preventing COVID-19, which arguably jump started a strong market rally over the next year.

In the current environment, the path of inflation and interest rates, and whether the Federal Reserve (Fed) can stick the soft economic landing will likely be more consequential than the election.

Indeed, stock market returns following the initial Fed rate cut have largely been dependent on whether the economy avoids recession.

With the tech sector now accounting for more than 30% of the S&P 500 and the weight of the top 10 stocks in the overall index at the highest level in more than 40 years, the success of artificial intelligence driving earnings will also have a great influence on future market returns.