Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist
Wednesday, December 6, 2023
The 2024 presidential election takes center stage next year, and of course we will all be monitoring the polls closely for any signs of a leadership change in Washington, D.C. It’s too early at this point to speculate on a potential winner, though polling and odds makers are pointing to a Biden-Trump rematch.
Regardless of who is in the White House in 2025, we do know the S&P 500 has generated an average gain of 7% during presidential election years dating back to the 1952 election. That’s a far cry from the average gain in year 3 of nearly 17%, but it should help calm fears that the election might derail the bull market.
Source: LPL Research, FactSet 12/05/23 (1950 – 2022)
All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.
Priming the Pump
Another angle worth highlighting is that during a re-election year such as 2024, the average S&P 500 gain jumps to 12.2%. We believe this pattern is partly due to the incumbent priming the pump ahead of the election with fiscal stimulus and pro-growth regulatory policies to stave off potential recession and encourage job growth. Every president who avoided recession two years before their re-election went on to win and every president who had a recession within two years before their re-election went on to lose.
This presents a tall hurdle for Biden given so many leading indicators point to some economic contraction next year. As you will see in the LPL Research Outlook 2024: a Turning Point (ETA 12/12/23), LPL Research forecasts a mild and short recession at some point next year, which could point the needle toward the GOP even though LPL Research expects a relatively muted market reaction.
Limited Pump-Priming Opportunities
With Republicans in control of the House, opportunities are limited for Biden to prime the pump next year. But keep in mind stimulus passed in 2022 will still be flowing through the economy throughout 2024, which is one of the reasons most economists underestimated growth this year. In fact, most of the spending from the Inflation Reduction Act passed in August 2022 will hit during fiscal years 2024-2026, providing support for the economy next year and bolstering the Democrat’s chances.
Still, we may see some actions that don’t require congressional approval like more student loan forgiveness and regulatory maneuvers that could potentially help support the economy ahead of the election, but they are likely to be limited in size and scope.
For those who might think this stock market angle is conspiracy theory, consider that three-month returns before an election have predicted 20 of the last 24 elections. In other words, when stocks are up three months before Election Day, the incumbent typically wins. Conversely, when stocks fall during the three-month period before Election Day, the incumbent tends to lose. It’s early to start thinking about that but rest assured we’ll be all over that come August.
Bottom line, history suggests that stocks will likely move higher next year despite policy uncertainty surrounding the election. LPL Research also expects the inflation, interest rate, and corporate fundamental backdrops to be supportive, as you will see in LPL Research’s Outlook 2024: A Turning Point next week. That said, an increase in market volatility leading up to the election in late summer/early fall would not surprise us and be consistent with history.
Much more to come on potential implications of the election for the economy and markets here and here in the months ahead.
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