How Will the 2024 Election Impact the Stock Market?

By: Brian Seay, CFA

What happens to the stock market during election years? Does it matter who wins? Did you know that the stock market does better under democratic administrations?

Despite all my economic education and financial background, I didn't know that apparent fact until I started researching this article. My goal here is to arm you with real data and perspective so that you can use to invest and vote intelligently during this election year.

After all the news will suggest that the stock market does do better under Democrats. As a matter of fact, if you search right now, you will still find an article from CNN titled “The stock market does better under Democrats and history proves it”

So let’s discuss what really happens to markets and the economy because of elections and find out if this article is really true.

When we look at prior election years, there are only a few that stand out as being significantly different than average stock market returns. In our analysis here, we use the S&P 500 Index as a proxy for the overall stock market.

In 1980, Reagan was elected, and the market was up 32%. However, that followed significant turmoil in the 1970s when the market was basically flat for over a decade. Bill Clinton was elected in 1996 and the stock market was up 23%. That was the beginning of the tech bubble. Obama was elected in 2008 and the market was down 37%. That wasn't because people didn't like Barack Obama. We were in the middle of the Great Financial Crisis.

When you look at all other election years since the great depression, you see S&P 500 returns that are close to the long-term average annual return.

We have a democrat in office now, so let's examine historical results for election years when a democrat held the Presidency.  Going back to President Hoover in 1928, when a Democrat is in office and a Democrat is elected, the total return for the year averaged 11%. When a Democrat was in office and a Republican was elected, the total return for the year averaged 12.9%. Not that different.  

So, when we look at election results over time, the data suggest that the election itself does not drive stock market returns. The state of the economy is the most important factor driving stock market returns.

Does that mean that the election results don't matter? Does it not matter who's in office or does it matter whether you have a Republican or a Democrat in the White House?

Let's revisit that CNN article suggesting that the market does better under Democrats. That article cites returns during democratic administrations, and that is true data. Returns have been higher during democratic administrations.  

However, drawing conclusions from only return data is shortsighted. Republicans were in office during the 1928 crash and again during the 2008 financial crisis. Arguably, the cause of both of those events were policies enacted by previous administrations. Democrats then took over during the significant recoveries that immediately followed those two collapses. If you remove just those two examples from the data, the difference in stock market returns during different party administrations becomes statistically insignificant.

Rob Arnott at Research Affiliates studied developed stock market returns around the world. They concluded that the difference between liberal and conservative parties is also statistically insignificant.

So proper data analysis would not conclude that the party in power is a significant driver of returns. Any conclusion that's made looking at that data alone is short-sighted.

So, does that mean that the election results don't impact markets or the economy?

No, they absolutely do. The lag time is just longer, making it more difficult to tie stock market results to a particular election or policy action. Take the recent actions from the Biden administration in 2021.  The administration passed the $1.9 trillion “American Rescue Plan,” their COVID 19 bill. That legislation sent paychecks to many Americans, regardless of whether they lost their job during the pandemic or not. That created extreme demand for goods across the economy and was largely responsible for the high inflation we saw in 2022. We are still recovering from that today. That’s a two-year delay between policy passage and its full impact.

The Biden administration’s Build Back Better plan is another good example. The administration passed $2.2 trillion of infrastructure spending in 2021. Two years later, only $400 billion has even been allocated to projects, much less actually spent. Policy does impact the economy, but it's hard to ascribe the impact because of the time it takes to work through the economy.

So, what should I look for as a voter? How can the government create a strong economy?

Our view is that decades of research shows that the best use of government is to stay out of the way of the economy. It turns out, the economy is very capable of raising the standard of living in the U.S. and around the world all by itself. One way to keep the government out of the way is to reduce its funding, in other words, lower taxes.

Lower taxes, within reason, are better than higher taxes for the economy. Taxes never make the business case for a new project better. Taxes never help a small business grow. They don’t make it more attractive to invest in equipment or hire. You may hear things about depreciation and other tax strategies, but all of that is simply shifting when taxes are paid, they don’t change the underlying reality that taxes are an expense. Period. End of story. It's just math. It's not politics.

Further, tax dollars tend to be poorly allocated and destroyed when they're invested by the government. You may remember a few years ago that the government attempted to play venture capitalist and invested in a soler power energy company, Solyndra.  Not surprisingly, Solyndra went bankrupt. Republicans have wasted money on many defense projects over the years that saw costs rise way above estimates. Over the years, bad spending has happened on both sides of the aisle.

 So good economic policy is generally just to let the economy operate inside wide guardrails that prevent capitalism from reaching extremes too quickly. A small social net is still a good thing. Food stamps and social security provide stability during economic downturns and a safety net to those in need. Limited government influence over mergers and acquisitions prevents giant monopolies, which ensures competition and innovation. A strong military acts as a deterrent, keeping the country out of war so that resources can be deployed elsewhere across the economy. So some government is productive for society.

But all government interaction with the economy should be framed as “how little can we do to ensure a functional society” and not “how can we transform the economy to meet our political objectives?” 

The economy is huge.  From my perspective, it's hard to see how a few hundred bureaucrats in Washington could have enough perspective to make smart decisions for the entire economy. Their job should be to set wide guardrails and let the mechanics of capitalism work. The evidence over the last 300 years is that this approach has worked well.

That same axiom is true about debt and deficits. Neither party’s hands are clean, regardless of whether you look at ratios like the debt to GDP ratio or the federal deficit to GDP ratio; or just the total level of us government spending. Spending tends to go up, not down, going back to the turn of the century.

George W. Bush increased debt levels to fight wars in the Middle East. Obama increased debt levels to fight the financial crisis. Donald Trump increased debt levels. Joe Biden is currently increasing the level of the national debt. Arguments by either party that they are the best at reducing spending should fall on deaf ears.

So, what is the appropriate stance on federal spending?

The appropriate stance on federal spending is for the federal government to spend when the economy is weak to stave off crisis. SOME economic stimulus during the great financial crisis and during COVID-19 was appropriate. But, once those immediate crisis periods end, the government should spend less and “pay back” some of that spending by reducing the national debt. Unfortunately, the payback never happens.

In conclusion, “it’s the economy stupid”…. that drives markets, not the election cycle. So waiting to invest based on some result in November is likely a bad strategy. Regardless of who wins, the prospects of the stock market over the next few years will be determined by the economy, not the party in power.