Global Finance | 6 February 2024

How will this year’s US election affect investment markets?

2024 will be a huge year for democracy with around half the world’s population going to the polls. David Broomfield, Multi-Asset Strategist at Coutts, argues that the upcoming election in the US is the most important for investors, and looks at its potential market impact.

Of all the elections around the world this year, with about four billion people voting in over 60 countries, the most significant will be in the US.

That’s not because it’s the world’s largest democracy – that accolade goes to India. It’s because the choice between a Republican or Democrat as President represents nothing less than a referendum on America’s relationship with global historic norms and established institutions.

Such institutions include the United Nations, NATO and the International Monetary Fund, their scope and responsibilities often subjects of campaign debate.

Since America’s emergence as the global superpower after the Second World War, it has effectively crafted the world economic order we all live in today. It’s therefore absolutely right that market participants will watch this election above all others. 

The US election’s impact on markets

But what could it mean for investors? Historically there are some interesting patterns when it comes to US elections and investment returns.

Looking at calendar year returns for the S&P 500 from 1928 to 2023, our research found that there was very little difference between average returns in an election year and average returns across all years (11.0% vs 11.5% respectively*).

So performance has been neither better nor worse in an election year than a ‘normal’ year. But there appears to have been more chance of positive returns in an election year. Our research* found that 83% of the election years since 1928 saw positive returns, compared to 73% across all years.

Be this as it may, the US election, indeed all elections, rarely have a significant impact on investment returns. It still holds as true today as it has for the last 75 years that their impact on markets is minimal, at least over the medium term.

The economic influence of interest rates, inflation and company earnings are the real, material driving forces.

It’s always worth remembering that past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not get back what you put in. You should continue to hold cash for your short-term needs.

“Since America’s emergence as the global superpower after the Second World War, it has effectively crafted the world economic order we all live in today.”

 

David Broomfield, Multi-Asset Strategist, Coutts

 

The Coutts view

Our view remains that 2024 investment performance will be driven by macroeconomic factors such as how many interest rate cuts the US Federal Reserve delivers, the pathway of inflation and the ability of firms to deliver earnings growth. And we’re seeing positive developments in all those areas currently.

US economic growth is robust – it remained resilient throughout the recent rising interest rate cycle – and inflation has been falling. Meanwhile, the US Federal Reserve has indicated it could cut interest rates if prices continue to come down, even if growth remains healthy.

That all paints a potentially positive picture for investors.

We are therefore positive on the US economy currently, and stocks generally, and are positioned accordingly. We're overweight both the US and risk assets more broadly.

Who’s better for returns – Republicans or Democrats?

Counter-intuitively, neither a Republican nor Democratic election victory across the board (i.e. White House and Congress) has necessarily been better for market performance in the past. Our research* actually found that markets tend to do better when both parties hold some power across the government.

Markets dislike uncertainty, and having one party win outright is arguably the most uncertain political outcome as it could enable that party to enact sweeping political change. It appears having cross-party checks and balances in place is more likely to calm market jitters.

Whatever happens, we should still expect ‘normal’ volatility in markets in the months running up to the election, particularly one as politically charged as this year’s. Markets need time to digest uncertainty associated with elections.

They do digest it eventually though. And that’s precisely why any market volatility tends to be short lived. Elections happen. Markets briefly react. Then they move back on to the economic fundamentals. 

Some thoughts on the US political landscape

Remarkably, the world’s oldest democracy ratified its constitution in 1789, and that same 18th century text still guides the US today. Many other democracies’ constitutions came later (Norway in 1814, Australia in 1901), or were reformed or replaced to better deal with the modern age (Sweden has had several versions, the latest in 1974).

This original US constitution allowed for the same number of senators to be appointed from small rural states like Nebraska as economic behemoths like California, which is equivalent to the world’s fifth biggest economy. And the US is still not a proportionally represented democracy today. 

It’s therefore perhaps inevitable that, when assimilated by modern times, this original text would create what many see as a political lack of stability today. It enables relatively small pockets of the US population to have a disproportionate influence.

But however the election unfolds, when it comes to markets, a resilient economy and positive outlook should mean the US presents a relatively positive story for global investors this year.

*Source: Coutts/Bloomberg, January 2023

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