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U.S. Election Year: Market Opportunities and Risks Before Crucial Vote

Last Updated November 27, 2023 3:08 PM
Giuseppe Ciccomascolo
Last Updated November 27, 2023 3:08 PM

Key Takeaways

  • Investing can be hard during volatile times, like months before a crucial election.
  • As U.S. electors prepare to vote for the next President, investors try to diversify their assets.
  • Money market funds (MMFs) are often seen as a safe haven during election periods.
  • Experts unveil secrets to easily cope with challenging times.

The United States is a Nation on the move, and the 2024 election is shaping up to be one of the most consequential in recent history. With two major parties vying for control of the country’s future, investors are understandably concerned about the potential impact on the markets.

Despite the uncertainties, there are also potential opportunities for investors in the lead-up to the 2024 election.

For example, some sectors, such as healthcare and energy, could benefit from increased government spending. Additionally, a weaker dollar could boost the performance of international stocks.

Overall, the 2024 election is likely to be a period of heightened volatility for the markets. However, there are also potential opportunities for investors who are willing to take on some risk.

Cash Isn’t Always The Wisest Decision

Investing can be a daunting task, especially when the political landscape is unsettled. Presidential campaigns often highlight the country’s challenges, and proposed solutions can vary drastically from the current state of affairs.

This uncertainty can lead investors to seek refuge in safe havens like money market funds (MMFs), which are similar to cash and generally considered low-risk investments. Capital Group  experts said that while MMFs may provide comfort during election cycles, they may not always be the most lucrative option.

Average net fund flows
Average net fund flows

Currently, the Federal Reserve is nearing the end of its interest rate hike cycle. As a result, yields on MMFs and other cash equivalents are likely to decline. This means that parking your money in cash could potentially lead to lower returns in the future.

“For a more secure investment option, consider bonds . Bonds offer the opportunity to lock in a fixed income stream for a predetermined period. While bonds are not immune to market fluctuations, they generally offer a more attractive return than cash equivalents, especially in a low-interest-rate environment,” experts said.

Attention To Volatile Sectors

While it would be convenient to identify foolproof sectors to invest in during election years, the complexities of politics and the economy often render such predictions elusive. The impact on markets and the broader economy often hinges on the proposed policies of the contending parties, particularly in sectors like healthcare and energy.

These sectors experience heightened volatility due to the stark ideological differences between the major U.S. parties on issues like universal healthcare, domestic energy production, and the promotion of renewable energy sources.

S&P 500 sectors one-year returns
S&P 500 sectors one-year returns

Each election cycle brings forward a new batch of candidates with their own policy agendas, and with the electorate evenly divided, predicting market winners and losers with precision can be challenging.

However, avoiding certain sectors altogether based on speculation about potential policy changes is not advisable. Often, concerns that a new administration could detrimentally impact a specific sector prove to be overblown, presenting an opportunity for investors who choose to remain invested.

Markets Don’t Care Who Wins

After the tumultuous period leading up to an election, the stock market often experiences a sigh of relief, historically outperforming its pre-election performance. Since 1932, stocks have averaged less than 6% growth in the year preceding a presidential election, compared to the 8% gains observed in non-election years.

S&P 500 cumulative returns
S&P 500 cumulative returns

Similarly, bonds exhibit a similar pattern, yielding around 6.5% in the lead-up to elections, falling short of the usual 7.5%.

Despite the uncertainties and anxieties that election years usually bring, the market’s volatility tends to be short. Once the votes are cast, and the new administration is established, stocks typically resume their upward trajectory. Investors who exercise patience and remain invested through the pre-election turbulence are often rewarded with significant returns.

Historically, stocks have averaged an impressive 11.3% growth in the 12 months following the end of the primary season – using May 31 as a reference point -, compared to a more modest 5.8% gain over the same period in non-election years. This post-election bounce underscores the resilience of the market and the tendency for investors to regain confidence once the political landscape stabilizes.

Underlying Economic Trends Really Matter

As the 2024 election cycle approaches, investors can expect some degree of volatility in the stock market. This pattern has been consistent since 1980, with stocks exhibiting increased nervousness leading up to Election Day. While the candidates’ proposed policies may grab headlines, it’s often the broader macro environment that has the most significant impact on market performance.

Contrary to popular belief, the impact of policy changes on the economy often takes years to materialize. Therefore, it’s crucial to focus on the near-term macro factors that are shaping the market landscape.

Investment growth
Investment growth

On a positive note, Goldman Sachs has maintained an optimistic outlook for 2024, echoing its bullish sentiment for 2023. The investment bank anticipates positive income growth for U.S. workers, driven by easing inflation and a resilient job market. Additionally, they predict a gradual leveling out and eventual decline in interest rates, along with an upswing in the manufacturing sector. These developments are likely to provide a favorable backdrop for stock prices.

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