Investor Positioning in a Presidential Election Year
January 28, 2024
The 2024 US presidential election is officially underway with former-president Donald Trump emerging victorious in the Iowa caucus and New Hampshire primary. While still too early to call, polling results appear to be favouring a Trump-Biden election rematch in November, with Trump currently holding a slight edge over Biden. Given uncertainties surrounding future policies and an expected increase in volatility in the months leading up to Election Day, how should investors position themselves? Some implications are explored below.
One area of focus is fiscal deficit. Biden, who is not expected to cut back on spending if re-elected, racked up a fiscal deficit of $1.7 trillion in 2023, or 6.3% of GDP, exceeding the 50-year average of 3.7%. Meanwhile, Trump is widely expected to extend his 2017 tax cuts once they expire in 2025. The net effect of either is unlikely to reduce the current deficit. Biden and Trump share some similarities in terms of trade policies – both are strong advocates of reshoring manufacturing, promote “Buy American” protectionism, and are willing to take a tougher stance on China. The resulting congressional configuration within the government could also have major implications. A gridlocked or divided government, where the House and Senate are controlled by different parties, could affect markets as it makes it difficult for Congress to pass sweeping legislative changes.
Historically, markets tend to be more volatile in the months leading up to Election Day. Any uncertainty is cleared up post-election, with markets typically staging a recovery after, regardless of the result. Since 1936, median returns in the first 9 months of an election year averaged 1.9%, compared to 3.1% during the last 3 months. Since 1980, the only two notable exceptions where markets fell post-election were in 2000 and 2008, years of the dot-com bubble and global financial crisis respectively. To conclude, uncertainties around presidential candidates and their policies are likely to contribute to market volatility leading up to Election Day, but investors should not shun risk assets or try to time the market. Both Biden and Trump are not expected to reduce federal spending, which would be supportive of markets. In addition, macroeconomic and financial conditions, as well as corporate fundamentals will continue to be key in driving markets. Investors should remain positioned for the long term, letting financial goals, investment horizon and risk tolerance dictate their portfolios, and not the political cycle.
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