Unlock Your Election Investing Edge
Robert Ross|September 17, 2024
It’s impossible to escape politics in the U.S. these days.
Whether it’s the ongoing concerns about U.S. government debt, former President Trump’s legal battles, or Kamala Harris’ proposed plan to tax unrealized gains, the political noise seems endless.
That’s why I usually avoid politics in these letters. While I have my own political views, I set them aside when making investment decisions.
But there are times when politics and markets intersect. One of those times is during presidential election cycles, where the influence on the stock market is more pronounced, like the “market seasonality” we discussed last week.
And as we approach the 2024 election, this intersection becomes more and more relevant.
Clear as Day
Stocks have been on a great run in 2024.
Optimism over the Federal Reserve cutting interest rates, strong earnings growth, and the absence of a U.S. recession have catapulted the S&P 500 to all-time highs.
But there’s been one other tailwind for the market this year: the Presidential Election Cycle Theory.
If you’re unfamiliar, this theory suggests there’s a certain rhythm to how the stock market performs during the four-year U.S. presidential election cycle.
Economist Yale Hirsch developed the idea. He tested it by analyzing historical market data and presidential election cycles over 120 years.
Here’s what he discovered…
The first year after an election tends to be a bit sluggish for the stock market. The new president is settling in and getting plans in motion. On average, the S&P 500 has delivered modest gains in the range of 5% to 6% during this year.
But things tend to improve in year two with midterm elections. This is when the president and their party try to boost the economy to improve their chances in the upcoming midterms. The market tends to respond positively, with average gains of 7% to 8%.
We tend to pick up momentum in year three, or the year before the next election.
This is when the stock market tends to really shine, as the president and their party are eager to show strong economic results before the next election. They push policies that could potentially give the market a boost, which is why year three has seen some of the strongest gains with average returns of about 15%.
However, things get a bit uncertain in an election year. The market might experience some ups and downs as investors worry about potential changes in leadership and policies. Yet despite the jitters, election years have still seen moderate gains on average, usually around 6% to 7%.
As you know, 2024 falls on year four of the presidential election cycle.
And so far, the S&P 500 is following the historical trend to a T.
The election year is one of the most profitable parts in the Presidential Election Cycle Theory… with the stock market experiencing its second strongest gain.
In an election year, the incumbent president and their administration are highly motivated to implement policies that stimulate the economy and boost the stock market. This is because they are keenly aware that the upcoming election will be a referendum on their economic performance. The goal is to create a favorable economic environment that can be leveraged during the campaign to gain voter support.
This election cycle, we’ve seen significant legislative efforts aimed at economic stimulus, such as the Inflation Reduction Act and the CHIPS Act (2022), as well as attempts to address financial burdens, like the Biden administration’s effort to cancel $20,000 in student loan debt (2024). These actions have been strategically timed to ensure that the economy is in a strong position as voters head to the polls.
These stimulus measures often put more money in the pockets of people and businesses… which translates to higher earnings for many publicly traded companies.
And since earnings are the main driver of stock market gains, it’s why we often see stocks perform well after those efforts.
But if history is any guide…
Stocks are likely to keep rallying.
Comeback
As both Shah and I have written about, September is historically the worst month for the S&P 500.
However, I expect any pullback to be short-lived as the S&P 500 typically rallies into the presidential election and afterward…
For those investors with a long-term time horizon, this can be a great period to add to your long-term positions. As we’ve talked about multiple times, the way to make money in the stock market is to buy quality businesses and hold their shares for many years.
That’s exactly what we’re doing in Breakout Fortunes, where we have a portfolio of quality small cap names. In fact, we took a 100% partial gain on one position a few weeks ago.
Keep in mind the presidential election cycle is typically a good thing for stocks.
So don’t get shaken out of your positions.
Robert Ross
Robert Ross’s unique style of clear and direct stock research helped him build a massive following in the investment research industry, starting his career at investment research company Mauldin Economics and quickly rising through the ranks to become one of the youngest chief analysts in the industry. Today, over a million investors turn to Ross every month for his take on investing, economics, and personal finance. He now shares his unique insights in Total Wealth and Manward Money Report.
