President Joe Biden and former President Donald Trump appear set for a rematch this November, and their policies could take the country in dramatically different directions.
Historically, it has benefited investors to play it safe in the time leading up to elections—and to take on more risk after. But there is reason to doubt the typical playbook will pay off this time.
Since 1972, utilities and consumer staples stocks have led the
S&P 500
in the six months prior to presidential elections, with median returns of 9.3% and 7.8% respectively, according to Ned Davis Research. They have both outperformed the index nearly two-thirds of the time.
At the underperforming end of the spectrum are information technology and materials stocks, with returns of 2.4% and 1.7%.
Cyclical sectors tend to start outperforming about a week before elections and beat defensive sectors over the following year.
“Investors don’t like uncertainty. It doesn’t matter what the uncertainty is, and political uncertainty is no exception,” said Ed Clissold, chief U.S. strategist at Ned Davis Research.
But there is no guarantee that 2024 will be a replay.
For one, while the historical average suggests a defensive tilt beginning at the end of the first quarter, there are unique circumstances at play this year with a combination of strong economic growth and the Federal Reserve potentially nearing rate cuts. Those circumstances tend to benefit cyclicals, Clissold notes.
“A benign backdrop of falling inflation and positive economic growth and a friendly Fed could likely outweigh historical defensive tendencies,” Clissold said.
Perhaps counterintuitively, many of the same industries outperformed and underperformed immediately after Trump’s and Biden’s first elections. In the 21 days after the 2016 and 2020 contests, banks, energy equipment and services, consumer finance, and airlines stocks all bested the S&P 500, while sectors like utilities and household products underperformed, Ned Davis Research said.
If the economy starts to worsen, the typical postelection rally is no sure thing either.
Trump, for his part, has promised 10% across-the-board tariffs on imports—a move that could reignite inflation and hurt global trade. Biden wants to raise taxes on the wealthy and on corporations and could have a prime chance to do so when Congress turns to address expiring provisions in Trump’s 2017 tax law next year. Neither of those policies necessarily portend well for stocks, all else equal.
“Our view is that there is likely no market upside related to November’s election; the outcome is either status quo (incumbent party stays in power), or increased uncertainty related to global trade and geopolitical or domestic tensions,” wrote
J.P. Morgan
chief market strategist Marko Kolanovic in a note earlier this month.
As far as the election is concerned, history might give investors a hint of the future. It certainly doesn’t offer a playbook.
Write to Joe Light at [email protected]
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