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As the election race heats up, the stock market is watching closely, like an eager spectator with a front-row seat to the action. With every policy debate and poll result, the market reacts, turning each economic talking point into a new chapter in the unfolding drama.
Vice President Kamala Harris and former President Donald Trump are making last-minute moves to woo voters, each promising to boost prosperity and keep wallets full. For many Americans, the stakes couldn’t be higher, with the economy ranking as the top issue this November.
Election years often send the market on a rollercoaster, spurred by shifting investor sentiment and speculation. So, what exactly can investors expect as we speed towards election day? Let’s explore the main economic issues that influence voters. We will look at how the market may respond and see how past elections can give us hints about what might happen next.
Top 5 Economic Issues Influencing Voters in 2024
This year, economic pressures are the dominant theme driving voter decisions. There are 5 important issues that reflect the broad concerns of both households and businesses.
This election season is occurring amid unique economic challenges, with inflationary pressures, evolving employment dynamics, and geopolitical uncertainties influencing both market sentiment and consumer confidence. As a result, key economic indicators will be closely monitored in the run-up to the election. These include:
Inflation
While inflation has cooled from its peak of 9.1% in June 2022 to a more manageable 2.4% as of September 2024, prices remain high, straining household budgets. This is expected to weigh heavily on voters’ minds, as inflation continues to impact their financial stability.
The Job Market
Despite a robust job market with historically low unemployment rates, a slight uptick in unemployment in recent months has raised concerns. Wages have been growing faster than inflation since mid-2023, which has offered some relief, yet voter sentiment remains wary as economic uncertainty persists.
Immigration
The economic implications of immigration policy are a prominent issue this year. Former President Trump has pledged a substantial crackdown on illegal immigration, which he claims will reduce economic strain, while the Biden-Harris administration focuses on immigration reform as a balanced approach to supporting the labor force.
Taxes
Both candidates have introduced tax reform ideas. Trump has proposed a comprehensive tax cut plan, including reductions for Social Security beneficiaries and incentives for car buyers, while Harris advocates for targeted tax cuts aimed at middle-income households and service industry workers. These competing proposals reflect differing visions on stimulating growth through tax policy.
Federal Deficit and Debt
The U.S. deficit and national debt continue to grow, with both candidates’ economic policies projected to add to the national debt over time. Fiscal responsibility is a pressing concern for many voters who see the deficit as a potential risk to economic stability and future growth.
Investors are also keenly aware that while a presidential administration can implement policy changes, some economic factors—such as global commodity prices, international trade issues, and supply chain disruptions—are beyond a president’s direct control.
Historical Election-Year Stock Market Trends
Election years are notoriously volatile for markets as the uncertainty surrounding potential policy shifts influences investor sentiment. One widely discussed phenomenon is the “Presidential Election Cycle Theory,” which suggests that stock market performance fluctuates according to the four-year election cycle, often experiencing slower growth or more volatility early in the election year. However, historically, markets tend to recover in the latter half as investors gain confidence in the likely election outcome and potential policy implications.
According to historical data, election years have generally shown positive returns in the second half, a trend tied to reduced uncertainty as campaign messaging becomes clearer. This phenomenon often provides an opportunity for stocks to perform better once investors feel they can anticipate the future political landscape with more certainty.
Stock Market Performance Under Republican vs. Democratic Presidents
The question of which party has historically driven stronger stock market performance remains a hotly debated topic, though there is data to help inform the discussion. When examining returns over the last 100 years, markets have generally performed well under both parties, though outcomes vary depending on the timeframe and economic context:
- Democratic Administrations: Over the past century, stock markets have often performed well under Democratic presidents, with the S&P 500 showing an average annual return of about 10.6% during Democratic terms, compared to around 6.7% under Republicans. This trend has persisted across different decades, with the Obama administration seeing the S&P 500 rise by over 235% from 2009 to 2017, driven by recovery from the financial crisis and strong tech sector growth. The Clinton administration also saw significant gains, with the market growing by nearly 210% from 1993 to 2001, spurred by tech advancements and a balanced federal budget.
- Republican Administrations: Republican presidents have also presided over strong market periods, particularly when policies prioritized tax cuts and deregulation. During Reagan’s presidency, from 1981 to 1989, the S&P 500 returned approximately 117% as tax cuts and market-friendly policies took effect. More recently, under the Trump administration, the S&P 500 increased by about 67% in the three years prior to the pandemic-driven decline in early 2020. While the average stock market returns under Republicans have historically been lower than under Democrats, market performance is influenced by broader economic cycles, external shocks, and policy factors that often transcend partisan lines.
These statistics show that there are patterns. However, economic fundamentals, global conditions, and investor sentiment influence market performance. This can shift across both Democratic and Republican administrations.
Potential Scenarios and Their Impacts
The range of potential election outcomes includes various economic scenarios that may affect different sectors and asset classes:
Continuation of Current Policies
If voters favor the current administration, markets may react positively to the stability of policy continuity, particularly in sectors like renewable energy, healthcare, and technology.
Shift in Economic Policy
A change in administration could bring shifts in regulatory and tax policy, potentially leading to a short-term market correction as investors adjust to new economic realities. Sectors such as traditional energy, financial services, and industrials may experience increased volatility as policies are debated and implemented.
Tips for Investors: Staying Strategic Amid Election Volatility
Investing through an election cycle can be challenging, but a balanced approach is key. Here are a few strategies for navigating this period:
- Maintain Diversification: A diversified portfolio helps manage risk across different sectors, reducing exposure to election-driven volatility in any single area.
- Take a Long-Term View: Avoid making reactionary decisions based on short-term election headlines. Historically, markets have shown resilience, and long-term strategies tend to yield better results.
Key Takeaway
As we approach the election, the intersection of politics and economics will play a crucial role in shaping the market landscape. Investors should remain vigilant, informed, and strategic as they navigate this potentially volatile period, keeping an eye on the evolving economic narrative and preparing for various outcomes. The key to thriving in this uncertain environment lies in a thoughtful approach that considers both short-term fluctuations and long-term investment goals.
