Elections or economy – which matters most for investors?

Please note: All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points

• Around half the global populace goes to the polls in 2024. As investors mull the potential implications of the results, especially in the US, find out just how much they matter for financial markets.
• However, taking investment decisions based on your view on a candidate or the likely impact of them winning an election can introduce bias and lead to poor results. This is especially true of a more polarised American electorate, where party affiliation seems to matter over how people perceive a country’s economic performance.
• Making simplistic calls over whether a Republican or Democratic president is better for financial markets can be misleading. For instance, the S&P Oil & Gas Exploration and Production Select Industry Index has surged by 269% under the more environment-friendly Biden administration.
• Staying invested and focusing on your long-term goal is usually the best approach to growing your wealth, whether in an election year or not.

This would seem to be a year of heightened political risk for investors’ portfolios with a deluge of elections across the world, not least in the US. Indeed, approximately half of the global population is eligible to vote at the polls¹. 

A question on many investors’ minds is how do I position my portfolio for the upcoming elections? Should I hold off investing until the outcome of an election is clear before getting invested or making investment decisions?

Elections are difficult to predict. Even if the outcome could be predicted, the market implications of an election result can still be very uncertain. That said, for all the noise, sometimes the effects of votes on valuations can be limited. The best course of action for investors is to stay invested and follow good investing principles, which hold across all periods in time, whether in an election year or not.  

Beware of behavioural bases 

Before examining the interplay between elections and investing, it’s important to be aware of behavioural biases that can affect the way that investors perceive coverage of elections.

Be wary of ‘confirmation bias’ − when people seek out, and pay more attention to, news and stories which confirm their own pre-existing views or beliefs. Using a personal view on a candidate or the likely impact of them winning an election, and using this as the lens through which to take in information and make investment decisions, can introduce bias and lead to poor results. 

It is important to consult a range of sources and viewpoints to ensure that decisions are being made objectively, on the basis of all the information. This includes data or views that might contradict an investor’s view on the world.

November’s election in the world’s largest economy, the US, will be a focal point for many investors in 2024, given its heft in global indexes and thus how exposed investors might be to the region.  

All eyes on Washington 

The political environment in the US, and the media coverage of it, is extremely charged and partisan. But for all the partisanship, and in turn how it affects people’s views on the domestic economy and other important issues, what might the effect of the election outcome be on financial markets? 

The chart shows the outcome of previous US elections, and the subsequent performance of the S&P 500. The data is mixed, showing that the common consensus that one party is unanimously good for investors, and the other bad, is not necessarily the case. 

US Elections and subsequent equity market performance 

Probably more important than the vote, is the outlook for the global economy, and therefore prospects for the domestic one, for investors. A boom period will be unanimously be better for both parties than a recessionary period, irrespective of domestic policy. As stated in our Macro chapter, ‘Global economy resilient in the face of headwinds’, US economic activity is likely to slow in coming months. 

Additionally, the sectors that might be expected to perform best under a particular party can surprise. For instance, under Joe Biden’s presidency the S&P Oil & Gas Exploration and Production Select Industry Index is up 269%, whereas the NASDAQ Clean Edge Green Energy Index is down 29%. Despite climate change initiatives being a central policy priority for the Biden administration, the US oil and gas industry has flourished, with production at record levels and higher energy prices than in 2020. 

What to look at?

What tends to drive markets in the long run is economic growth, and thus economic fundamentals should be the key factor for investors. 

Whilst elections will occupy the headlines, it’s important to remember that political stories do not always translate into policies, or market events. The test for both US candidates will be on the fiscal side, and whether the market will allow them to follow an accommodative fiscal policy, or whether they will have to be restrictive, with the associated uncertainty if and when the US debt ceiling becomes a sticking point as it has been in the past. 

In the US, the economy is a top priority for voters. Whilst voters pay great attention to economic data when going to the ballots, it’s important to recognise that perceptions of the data can differ wildly between voters with different political affiliations.

Economic data is subject to perception

The US has been the strongest performing economy of any other large high-income country since 2019. Growth, jobs and investment have been strong. Inflation has also retreated recently, without a significant rise in unemployment, a fear that had worried some. It has been a period of economic boom, one backed by fiscal spending and high-profile legislation that has supported this performance. 

Nonetheless, 57% of voters disapprove of Joe Biden’s record². One reason has been soaring inflation until recently; price rises have been higher than those seen for many decades under the Democrats. People who feel poorer under this administration are unlikely to feel much sympathy towards it, whatever the contributing external factors not within its control. People who feel big increases in the price of groceries appear to extrapolate them.

More important is the fact that perceptions of the economy are political, with Republicans seeing a bad economy when their opponents are in power and vice versa. Today, in part due to the media landscape, people do not just have their own opinions and facts are more disputed. The economy they see is not necessarily the one they experience day to day. Rhetoric can matter more than the economic reality. So, what does this mean for investors? 

Stick to good investing principles

Elections matter for a host of different reasons, be that for domestic politics, society or economics. A new administration can introduce legislation that can alter the path for growth, inflation and potentially interest rates. Thus, they can be significant for financial markets, and investors are right to pay attention to them. 

That being said, voters and election results can be unpredictable. Even predictable outcomes can have unpredictable impacts on markets. Those holding fire on making investment decisions until after an election outcome is clear so that they are acting under less uncertainty, may be disappointed to find that uncertainty is a constant. 

In election years, as in others, following tried-and-tested investing principles is likely to be the best way for investors to protect and grow their wealth and that of the next generation. This means getting, and staying invested, so as to reap the rewards from putting capital to work over the long term. Deploying this capital in a well-diversified portfolio allows investors to better achieve their long-term goals through different market environments and in a smoother manner, from both a financial as well as an emotional standpoint. 

The importance of staying invested through wars, elections and much else besides is seen in the next chart. This shows that the different consequences of choosing to invest $100 in one of US equities, bonds or cash over the last century. As can be seen, the power of compound returns is significant. As is the choice between equities and cash.

Please remember, that past performance is never a guide to future performance. You may get back less than you invested.

The case for long-term investing

Barclays US total return indices in nominal terms with gross income reinvested