Why Staying Invested Matters: Navigating the 2024 Election Regardless of Political Outcomes

September 5th, 2024 by Cory Large

As the 2024 presidential election approaches, many investors may feel anxious about how the results could impact their portfolios. It’s natural to wonder whether you should make changes based on which party wins. However, history and expert analysis suggest that staying invested is the best strategy for long-term financial success regardless of political outcomes. This article will explore why this is true and how other factors, such as interest rates, inflation, and sector performance, play a more significant role in shaping market dynamics.

The Historical Perspective: Resilience Through Election Cycles

The stock market has a remarkable track record of resilience, even in the face of political change. Historical data from the S&P 500 shows that, since 1928, the market has averaged an annual return of approximately 7.5% during presidential election years, regardless of which party took office ​(Schwab). This long-term growth is a testament to the market’s resilience, demonstrating that broader economic factors drive the market’s performance more than political leadership.

One of the most compelling pieces of evidence comes from a Vanguard study examining stock market performance over the past 160 years. The study found that the market generally trended upward regardless of which party was in the White House. This suggests that the forces driving market growth—such as innovation, corporate profitability, and consumer spending—are largely independent of the political environment.

Source: Vanguard Advisor Insights

Research from Charles Schwab further reinforces this view, emphasizing that economic fundamentals such as corporate earnings, inflation, and interest rates substantially impact market performance more than the political party in power​ (Investsg). Even during periods of significant political upheaval, the market has generally continued to rise over time.

This resilience is a critical reminder for investors: attempting to time the market based on election outcomes can lead to missed opportunities and lower long-term returns. Staying invested allows you to capture the market’s natural growth over time, regardless of short-term political noise.

Visual Reference: The chart below illustrates S&P 500 performance during various presidential election years, underscoring the market’s resilience over time.

August 2024 Market Summary: A Snapshot of Recent Performance

Before diving deeper into why staying invested is so important, let’s take a look at the market’s recent performance. August 2024 was a mixed month for investors. The S&P 500 extended its gains for a fourth consecutive month, driven by defensive sectors like P&C insurance, pharmaceuticals, and healthcare. These sectors tend to perform well during periods of uncertainty, reflecting a cautious sentiment among investors.

The equal-weighted S&P 500 index (RSP) outpaced the cap-weighted index, hitting a fresh record high. This suggests broader market participation beyond just the largest companies, indicating that the rally was supported by a wide range of stocks rather than just a few high-profile names.

However, not all sectors fared well. The Nasdaq underperformed, with notable losses in big tech stocks such as Tesla (-7.7%) and Amazon (-4.5%), even as Meta posted a substantial gain of 9.8%. The market started the month with a sharp selloff driven by concerns over slower job growth and the possibility that the Federal Reserve might be behind the curve on managing inflation. But as the month progressed, the market rebounded, erasing early losses amid rising optimism about a potential “soft landing” for the economy and expectations of future interest rate cuts.

This market activity serves as a powerful reminder of the importance of diversification and staying invested. Even during periods of volatility, different sectors and asset classes can perform differently, helping to balance your portfolio’s overall risk and return. Diversification is a key strategy that can provide a sense of security and balance in your investment portfolio, particularly during uncertain times like election cycles.

Visual Reference: The chart below demonstrates the average market returns by different election outcomes, offering a clearer view of how the market has historically reacted under various political scenarios.

Source: Schwab Research

The Case for Staying Invested

One of the most compelling reasons to stay invested during election cycles is the stock market’s ability to recover and grow over time, regardless of political outcomes. Warren Buffett, one of the most respected investors in the world, famously stated, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” His message is clear: despite uncertainty, the market’s long-term trajectory is upward.

Several key factors drive this long-term growth:

• Innovation and Technological Advances: Companies are constantly innovating and developing new products and services that drive economic growth and, in turn, boost stock prices. This innovation is largely independent of the political landscape.
• Consumer Spending: The U.S. economy is heavily driven by consumer spending, which tends to remain stable over the long term, even if it fluctuates in the short term due to economic or political events.
• Corporate Profitability: Ultimately, stock prices are tied to corporate earnings. As long as companies continue to generate profits, their stock prices will likely rise over time, regardless of who is in the White House.

Expert Insights: Interest Rates, Inflation, and Sector Performance

While the election will undoubtedly be a significant event, other factors—such as interest rates and inflation—are likely to have a more direct impact on your investments.

Interest Rate Cuts and Inflation: Recently, Federal Reserve Chair Jerome Powell reiterated the Fed’s commitment to managing inflation, saying, “We will keep at it until the job is done.” This signals that higher interest rates may persist until inflation is firmly under control. However, many economists, including those at JPMorgan Chase, anticipate that if inflation shows consistent signs of cooling, the Fed could begin cutting rates by mid-to-late 2024. This cautious approach is designed to avoid reigniting inflation while supporting economic growth.

Mohamed El-Erian, Chief Economic Advisor at Allianz, echoed this sentiment, noting that “even as inflation trends downward, the path to rate cuts will be slow and measured, particularly as the Fed balances the need for economic stability with inflation control.” This suggests that while rate cuts may be on the horizon, they will likely be gradual and carefully managed to prevent economic overheating.

Sector Performance: With the possibility of future rate cuts, certain sectors are expected to become more attractive. The mix of interest rate-sensitive and defensively viewed sectors like real estate, healthcare, and consumer discretionary could benefit from lower borrowing costs and cautious positioning from investors. For example, real estate investment trusts (REITs) may see increased demand as financing & mortgage costs decrease and developers are eager to begin the construction of new properties.

The Path Forward: Focus on Long-Term Goals

As the election season unfolds, it’s important to remember that short-term political changes should not dictate your investment strategy. The market’s performance will continue to be influenced by fundamental economic factors such as corporate earnings, interest rates, and global events.

At Anchor Bay Capital, we encourage clients to focus on their long-term financial goals. By remaining invested and maintaining a diversified portfolio, you can position yourself to navigate the uncertainties ahead and capitalize on potential opportunities in interest rate-sensitive sectors.

Diversification remains a key strategy, especially during times of uncertainty. A well-diversified portfolio helps spread risk across different asset classes and sectors, reducing the impact of any single event—such as an election—on your overall investment performance. Additionally, regular portfolio reviews can ensure that your investments remain aligned with your financial goals, even as market conditions evolve.

Final Thoughts

The upcoming election is just one of many factors that can influence market performance. By focusing on economic fundamentals and avoiding the temptation to time the market based on political events, you can help ensure your portfolio remains on track to meet your financial objectives. As always, Anchor Bay Capital is here to provide expert guidance and support as we navigate these uncertain times together.

Please contact your advisor for more insights on managing your investments during election years or to discuss your specific portfolio.