How the 2024 U.S. Election Might Affect the Stock Market – and Why You Shouldn't Sweat It
With the 2024 U.S. presidential election coming up, you might be wondering what it means for your investments. Elections can bring about a lot of uncertainty which causes market swings, making even the calmest of investors a little jittery. But here’s the thing: while elections often cause short-term ups and downs, they rarely affect long-term stock market performance. Long-term investors (which everyone should be), don't need to panic!
Let’s break it down:
Why Elections Cause Market Jitters
The lead-up to an election always brings a bit of uncertainty, which the markets don’t love. Investors try to predict who’s going to win and how new policies might impact businesses and the economy. This often results in the market having a little wobble - meaning stock prices can fluctuate more than usual.
While it might feel chaotic for a short time, it doesn't make a huge difference in the grand scheme of things. If we could change the saying 'don't sweat the small stuff' we would say 'don't sweat the market wobbles'.
Lets look at the track record
Historically, the stock market has performed well during U.S. election years, no matter who wins. In fact, over the last 75 years, the market has seen positive returns in 16 out of 18 election years! Pretty reassuring, right?
The “Presidential Election Cycle Theory" suggests that stock markets perform best in the third and fourth years of a president’s term, with the final year (the election year) often seeing strong gains...
Why? The president in office tends to roll out policies to boost the economy and consumer confidence before voters hit the polls. Whether or not they win, the market usually benefits.
Take the Trump and Biden years for example: despite their very different approaches, the stock market performed almost identically under both administrations. That’s because, over the long term, the fundamentals of the economy and the strength of businesses play a much bigger role than who's in office.
What adds to the drama?
The U.S. Electoral College system can make elections feel uncertain. But what is it?
Each state gets a set number of "electoral votes" based on its population—the bigger the state, the more votes it has. There are 538 total votes, and a candidate needs at least 270 to win the presidency.
The tricky part is that if a candidate wins even by a small margin in a state, they get all of that state’s electoral votes. So, winning by just 0.5% or by a huge amount has the same result! This "winner-takes-all" approach is why election results can seem unpredictable.
Since losing by 0.5% has the same outcome as losing by a landslide, it makes election results harder to predict. That uncertainty can trigger more short-term wobbles in the market. But again, it’s important to remember that this is usually temporary, and the market tends to stabilise once the dust settles and the new government’s policies are clearer.
Don’t Bet Your Portfolio on Politics
Trying to time the market, or adjust portfolios based on election predictions is risky for a couple of reasons. First, predicting the winner of an election isn’t easy (just ask all those pollsters who’ve been wrong before).
Second, even if you could predict the outcome, guessing how the new president’s policies will impact the market is even harder. Instead of getting caught up in the election buzz, it’s best to keep your eyes on the long term. Stock prices, in the long run, are driven by the fundamentals of the companies you're invested in—things like profits, innovation, and overall market conditions—not the results of a single election.
What You Should Do: Stay Focused on Your Goals
As the election approaches, it’s natural to feel a little uneasy about your investments. But history shows that, over time, the stock market tends to rise regardless of who’s in the White House.
So, the best approach? Stick to your long-term investment strategy, avoid making knee-jerk reactions to political news, and keep your financial goals in sight.
As always, we're here to help you navigate the markets—whether it's election season or not!
JOIN THE CURVE COMMUNITY
Take control of your future by learning how to be better with your money. Join the thousands of women in The Curve community who are dedicated to building their knowledge and their wealth through investing.
