Elections impact markets long before November
The 2024 presidential election is ramping up, with the Iowa caucuses last week and the New Hampshire primary yesterday.
Even though the actual election isn’t until November, elections can start impacting markets much earlier.
The same sectors and asset classes have different prospects under different election results
For one thing, markets generally don’t like uncertainty. And who wins the presidency means different policies that will impact the economy and markets differently.
For example, Piper Sandler’s portfolio allocations under different 2024 election outcomes vary considerably (table below). Many sectors/assets are Long under one candidate (green boxes) but Short under others (red boxes).
So, the uncertainty inherent to an election year makes it harder for markets to price different asset classes and sectors.
Election years see lower returns, higher volatility
The uncertainty also helps explain why average equity returns in election years – presidential and midterms – are about half what we see in non-election years (left chart below), according to research from PFG.
Furthermore, research from Capital Group shows that equity markets get off to a slow start during election years, moving sideways on average during primary season, and only start to rise in the summer, once we’re down to the final candidates.
Elections also add to volatility – going hand in hand with uncertainty.
Equity volatility (VIX) increases 25% in the months leading up to the election (right chart below from Bank of America). Then, after the election, we see volatility drop nearly 20% by the following month:
Macro factors (recession/expansion) matter a lot for post-election returns
Once the election is over, you might expect some clear impact on markets. In general, the market rises post-election, gaining 3.3% on average over the next three months (chart below).
But there’s no clear benefit for things like going from Republican to Democrat or vice versa or winning re-election.
However, there are three cases that follow the same macro-related pattern (chart below, orange boxes): Presidents Reagan, G.W. Bush, and Obama all saw negative returns following their initial election but positive returns following their re-elections.
That’s because:
- For all their initial elections, the economy was in or around recession (1980, 2001, 2007-09), and, of course, stocks tend to see losses around recessions.
- For all their re-elections, the economy was well into expansion (1984, 2004, 2012), so positive returns are more likely.
Macro factors (recession/expansion and rates) matter a lot to IPOs
The story is similar for initial public offerings (IPOs), too.
In the chart below, we have IPO activity ex SPACs, with shading for Republican and Democratic presidents, along with recessions marked off.
It seems that there’s not a clear relationship between elections and IPOs, but macro factors matter a lot:
- IPOs dropped around the 2001 recession and the Credit Crisis recession, which happened to coincide with the transitions from Presidents Clinton to G.W. Bush and from G.W. Bush to Obama.
- IPOs dropped once the Fed pivoted to rate hikes in Q1 2022 under President Biden (arrow).
A better guide to IPO activity might be our new Nasdaq IPO Pulse Index, launched yesterday.
Elections matter to markets, but macro matters too
So, if history is a guide, we should be prepared for higher volatility and potentially lower returns.
But, since macro matters too, markets and IPOs should be helped by the expected soft landing and Fed rate cuts this year.
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