We often get questions from clients regarding the potential impact election cycles have on financial markets, and the 2024 U.S. presidential election cycle is no different.

The simple answer is that history shows election cycles alone do not have a significant impact on financial markets. We recommend that clients invest for the long-term given their target asset allocation based on their financial goals and risk tolerance. Even in a negative scenario where we experience a market pullback, we expect markets will recover and move to new highs over a long-term investment horizon.

That said, we can still make a few observations regarding trends that occur during election years, while keeping in mind that the data can be subject to outliers. We have stock market data from U.S. presidential election years going back to 1928 covering 24 election cycles, which have also coincided with other significant events, such as the 2000-2001 Dot-Com Bubble, the 2008 Global Financial Crisis, and the 2020 COVID-19 pandemic, to name a few.

In presidential election years:

• Markets generally experience higher volatility (price movement swings).
• Despite unknown election outcomes, third-quarter market returns, on average, experience higher returns compared to non-election third quarters.
• The annual market return is on-average about the same as any other year.

Nothing New Under the Sun

Emotions tend to run high during election years, which is probably an understatement. We experience this even among our clients, as each person’s preferred presidential candidate strengthens or appears to lag in polling data. We can see our clients’ views and emotions on the U.S. economy change, sometimes drastically. This same emotional rollercoaster can appear in market data through large price swings, both negative and positive, during election years.

Despite the increased volatility, we tend to see higher-than-average returns in the third quarter of an election year. This is interesting because even though there is still ample time before the election outcome is known, markets tend to climb the “wall-of-worry” and on average have returned three times more in the third quarter compared to non-election years. However, when looking at the full year’s return data, it is comparable to the average return during non-election years.

Obviously, this is not always the case, but as a team we can think back to many examples (e.g. Brexit, U.S. government debt ceiling crisis, potential U.S. government shutdowns, and possible recessions) where the market continues to move higher despite significant economic uncertainty.

From a portfolio management perspective, increased volatility can be both beneficial and harmful to portfolio returns. An important tool we have when dealing with more volatile markets is to consider rebalancing portfolios (back to their target allocations) more frequently. Year-to-date, the S&P 500 Index (U.S. Large Cap Stocks) has produced strong returns (plus 18 percent as of Sept. 16). Despite the high returns YTD, the market has experienced over five pullbacks, each time selling off at least five percent or more. When markets tend to be more volatile but mean-reverting (recovering from selloffs), rebalancing helps to reduce risk in portfolios.

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Nikolas Madonis is a Wealth Analyst with RKL Private Wealth. He works closely with portfolio managers and advisors to create investment solutions for clients to help them best meet their financial goals.

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Brandon K. Adams is a Senior Portfolio Manager with RKL Private Wealth. He creates customized investment solutions for clients and helps them understand the importance of portfolio construction to their financial goals.