Right now, there’s a lot of economic uncertainty in the US. When will interest rates come down? Will we enter a recession?
Add into the mix that this is a presidential election year, and people are more confused and concerned about the economy than ever.
Studies show that almost one-third of Americans believe that their financial future will be negatively affected if the party they least align with is elected. Are those fears founded?
Today, I’m going to talk about how you can expect an election year to affect your finances.
How the stock market performs in an election year
I’m going to start with good news: studies show that an election has minimal impact on stock market returns.
The S&P 500’s average return during election years is about the same as non-election years.
The average return of the S&P 500 in election years was 11.3%, roughly in line with the 11.6% average return in non-election years.
In fact, election years saw the S&P 500 generate positive returns more frequently than non-election years: about 80% of election years saw positive S&P 500 returns, higher than the almost 70% for non-election years.
There also isn’t enough evidence to suggest a correlation between the party elected and stock market performance. After all, there are numerous factors that determine the performance of the stock market, including economic indicators, national and international crises, monetary policy, and corporate earnings.
In fact, the first two years of a president’s term typically coincide with weaker markets, while the last two years are more positive.
Intuitively, this makes sense. Presidents tend to champion tougher, more controversial policies early in their term. They then focus on more popular, pro-growth policies to campaign on coming into an election year.
Regardless, investing is still the most effective way to grow your money. Forbes ran an analysis that saw the S&P 500 generate higher returns than cash, outperforming cash by 8.1% on average.
Compared to other asset classes, Forbes saw the S&P 500 generate the best return, followed by corporate bonds, then gold.
This shows that remaining invested is still key to building wealth.
2024 Investing Strategy
Overall, it doesn’t look as though there should be any reason to deviate from or adjust your investing strategy just because it’s an election year. The principles of good investing still apply.
The most important thing is to not panic, remember that fluctuations are perfectly normal, and develop a well-diversified investment portfolio.
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