US Presidential Elections: Timing of economic cycles holds greater influence

As the U.S. presidential election approaches on November 5, global financial markets are closely watched for potential reactions. While elections often generate considerable public attention, historical data suggests that their impact on stock markets tends to be limited in the short term, but it pushes the market in the long term.

Party affiliations and economic growth: A complex relationship

The relationship between the political party of the U.S. president and economic growth has long been a topic of debate. Some studies suggest that the U.S. economy has historically grown faster under Democratic presidents compared to Republicans. However, this correlation should not be confused with causation. Economic growth is influenced by a range of factors including global conditions, technological innovations, fiscal and monetary policies, and unpredictable events like natural disasters or pandemics. Therefore, attributing economic performance solely to the president's party is an oversimplification.

Stock market volatility

Historical data shows that U.S. presidential elections have had minimal impact on stock market volatility, regardless of the election outcome. For instance, volatility in the S&P 500 index has remained below average in most election years since 1972, with notable exceptions during the 2000, 2008 and 2020 elections—periods that coincided with the dot-com bubble burst, the global financial crisis, and Covid-19.

Stock market performance in the 100 business days before and after U.S. presidential elections typically shows no significant deviation from historical trends. This suggests that investors are more focused on broader economic indicators than on political outcomes. It could be expected the starting of easing of monetary policy may lead to good upcoming growth.

S&P500 chart

Timing matters: Economic cycles vs. election cycles

The state of the economy plays a far more significant role in stock market performance than who occupies the White House. A president elected during the early or mid-stages of an economic expansion, like Bill Clinton in the 1990s, typically sees stronger market returns. In contrast, presidents elected at the tail end of a business cycle, such as George W. Bush in 2000, often face market underperformance.

The key takeaway is that timing matters. If a president takes office during the later stages of an economic cycle, their term is more likely to coincide with weaker stock market returns. Conversely, when elected in the early stages of growth, equity markets tend to perform well in the following months and years.

It could be said that initiating interest rate cuts may significantly impact stock performance, as these cuts could help stimulate economic growth, ultimately driving stocks higher.

Democrats vs. Republicans: Why the disparity?

One of the key reasons Democratic presidents have historically seen higher stock market returns compared to Republicans is the timing of their election relative to economic cycles. Democrats have been elected during the early stages of economic recovery on four occasions, while Republicans have typically been elected during later stages. This cyclical timing may explain the stronger market performance often associated with Democratic administrations.

However, it’s important to note that voters often opt for a change in leadership when the economy is weakening, which can influence the perception that Republican presidencies coincide with late-cycle market downturns.

Election 2024: Cycle or president?

Looking ahead to the 2024 election, the current economic environment may be more critical than the election outcome itself. If the Federal Reserve successfully achieves a soft landing, extending the business cycle, the economy could be categorized as mid-cycle. This would increase the likelihood of strong equity returns in the coming years. On the other hand, if the Fed fails and a hard landing occurs, the next president may face a late-cycle economy, leading to weaker market performance.

Historical market performance in election years

Since the inception of the S&P 500 Index, there have been 23 presidential election years. Of those:

• 19 out of 23 election years (83%) delivered positive market performance.
• When a Democrat was in office and a new Democrat was elected, the average annual return was 11.0%.
• When a Democrat was in office and a Republican was elected, the average annual return was 12.9%.

This suggests that while elections garner significant attention, market performance is influenced more by economic conditions than political transitions.