10/24/2024 | Press release | Distributed by Public on 10/24/2024 21:44
The professionals at Old National Investments are affiliated with LPL Financial, a leading independent broker/dealer and registered investment advisor. The content of this article was provided by LPL Research.
Normally, U.S. presidential elections come and go with a lot of fanfare, but not a lot of substance for investors. Plenty of brainpower is focused on analyzing election outcomes, but in the end, the variance in go-forward investment results are not solely driven by the political decision. While the 2024 U.S. post-election investment outcome could be a repeat of election years past, it is not a stretch to say that this time may indeed be at least a little bit different. Simply put, visibility into how this election season will play out has been meaningfully impaired this time around.
How could 2024 be different? First, this is clearly not a standard election season, as evidenced by the attempted assassination attempt of former President Trump on July 13 and President Biden stepping down as the Democratic nominee with less than four months until election day. As such, investors may seek to reduce their reliance on election playbooks of years past. The likely bifurcated policy outcomes, based on election results up and down the ticket, certainly adds a higher degree of uncertainty this go-round. Today, the divergence in policy between Democrat and Republican is much more pronounced than in years past, making policy and investment outcomes much more uncertain.
With President Biden stepping out of the race, Vice President Kamala Harris secured the Democratic nomination for president. Her campaign strategy is focused on the economy, social justice, reproductive choice, climate change, student loan debt, and consumer protection. Trump's campaign has been focused on the economy, border security, inflation, reducing the impact of special interests in Washington, energy independence, an "America-first" foreign policy, and more tariff-driven trade policy.
While the U.S. presidential election is rightfully getting the most attention this election season, there are also 34 Senate seats and all 435 House seats up for grabs. Getting the majority in both congressional chambers is likely to be a tough road for either party, especially as prediction market odds have begun to tighten since Biden stepped out of the race.
Historically, the stock market has been a surprisingly accurate and unbiased election forecaster. Since 1928, if the S&P 500 was positive in the three months leading up to an election, the incumbent party remained in control of the White House 80% of the time (12 of 15 elections). Conversely, a declining market in the same period usually signaled a loss for the incumbent in eight of the last nine elections. Overall, market trends have predicted 20 out of the last 24 elections. All that said - the unpredictability of this election season suggests we should be cautious about relying solely on these historical patterns.
S&P 500 Index returns three months before the presidential election
In Midyear Outlook 2024, we expressed our belief that volatility would likely increase in the second half, potentially around policy uncertainty related to the upcoming presidential election, geopolitical threats, or an expected reacceleration in inflation. History shows election years tend to be more volatile for stocks, particularly during the August - October time period as illustrated below. Analysis of annual election-year returns also reveals that the S&P 500 has generated an average price return of 7.3% (excluding dividends) during all election years
since 1952. However, when election years are positive, as they tend to be 83% of the time, the average price return jumps to 12.2%. So, while a strong stock market during an election year is quite common, we would acknowledge that additional pullbacks are to be expected given strong year-to-date gains.
Despite our belief that market volatility could pick up as we approach the election, stocks do tend to finish the year fairly strong when the election is over. So while we would suggest investors not get too aggressive with their portfolio allocations, given the potential volatility, elections have historically not been a cause to change investment strategies.
As noted above, increased stock market volatility is expected due to policy uncertainty ahead of Election Day. Although short-run market volatility is typically not good for stocks, it can be a benefit for the bond market.
A recent report from Guggenheim Investments examined the performance of various markets under varying economic policy uncertainty regimes. Per their work, since 1985, during U.S. presidential election years, the U.S. Economic Policy Uncertainty Index, which measures uncertainty related to economic policy based on media coverage, has averaged 17% higher relative to non-election periods. And the degree to which policy uncertainty prevails has had a meaningful impact on asset returns. The higher the economic policy uncertainty (and we expect to have material policy uncertainty as we approach this election), as illustrated in the chart below, the better high-quality bonds have performed.
While policy uncertainty may indeed be a reason to own bonds, we believe it is not the only reason. LPL Research believes the investment risk/reward trade-off between bonds and stocks does favor bonds at this juncture. Given that current starting yields in the bond market are attractive, and easier Federal Reserve policy could be a bond price tailwind, policy uncertainty could be the third leg of a bullish stool for bondholders.
While near-term political shifts prove to be of little importance in driving long-term investment returns, differences in policy approaches between the two candidates can create some investment opportunities. Below we list some policy divergences that we believe may be important with regard to potential economic and market impacts, and we share some investment implications to think about in the coming months and beyond.
As a result of some of the potential policy differences, we believe there could be likely market "winners and losers," depending on who stands as president in 2025. Note: The potential winners for each candidate highlighted below, would perhaps be more likely or more definitive should that candidate's party also control the House and/or Senate. Of the potential winners below, we believe renewable energy/EVs and Medicaid-exposed insurers may be the most likely beneficiaries in a Harris administration, while U.S. steelmakers and oil & gas, could be the most likely beneficiaries in a Trump administration. On the downside, a Trump administration may be the most detrimental to China's economy and its companies, while a Harris administration would perhaps weigh the most
heavily on the traditional oil & gas segment.
While the potential winners and losers we mentioned are notable, the biggest election variable may be go-forward tax policy. Indeed, the 2017 TCJA expires in 2025, making tax policy a big campaign issue this fall. Extending the tax cuts put in place by the TCJA would cost over $4 trillion over 10 years (estimated by the Congressional Budget Office). Trump would like a full extension, with tariffs generating some revenue as an offset, while a Harris administration favors extending tax cuts only to those with incomes below a certain threshold, similar to President Biden's previous proposals. The extent of additional pay-fors to limit the deficit impact are uncertain and would depend on the makeup of Congress. While the tax policies for the two candidates are different, there are some key items to highlight that may have potential investment implications:
Consumers and investors should become more familiar with the tax details below, as these variables could be subject to material change as a result of election outcomes. Please consult with your financial advisor and tax professional for more information.
Note that the 2017 Tax Cuts and Jobs Act (TCJA) is currently set to expire in December 2025.
Permanent provisions
Business
There is a large amount of data and history that suggests investors should avoid investment decisions based on election outcomes, some of which we've highlighted in this report. Still, some investors may be inclined to move their portfolios to be consistent with their projected presidential winner and the winners' and losers' outcomes we mentioned. Given the tightness of the presidential and congressional races and the amount of time before voters go to the polls, we would not recommend investors make such bets. However, we do suggest investors take this pre-election opportunity to prepare portfolios for higher-than-normal volatility that could come around this election season. Rather than focusing on predicting the winners, we believe protecting against likely volatility is the best investment advice one can give at this juncture, and keep a well-balanced, diversified portfolio. We would reserve any other investment judgement until after the election results have been formally tabulated.
LPL Research would like to thank LPL Financial's Government Relations team and specifically Mary Kate Clement for important insight and contributions to this report.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset class disclosures -
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses. The fast price swings of commodities will result in significant volatility in an investor's holdings.
All index information provided by Bloomberg and FactSet.
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