Key takeaways
President Joe Biden’s unexpected departure from the race set up a showdown between Democratic Vice President Kamala Harris and Republican former President Donald Trump.
The shakeup in the contest for the White House appears to have tightened the race in several key battleground states.
While investors take an interest in the election, it helps to maintain a proper perspective on the potential impact on capital markets.
While the year began with a fairly predictable Presidential election matchup, much has changed over the summer months. Former President Donald Trump easily cruised to his third consecutive Republican nomination. However, just days after July’s Republican National Convention ended with Trump selecting first-term Ohio Senator JD Vance as his running mate, Democratic President Joe Biden chose to drop out of the race, endorsing his Vice President, Kamala Harris as his replacement. Since that time, Harris earned the formal nomination and added Minnesota Governor Tim Walz to the ticket as her running mate.
The revised Democratic slate appeared to shake up the state of the contest. While former President Trump came away from the Republican convention with solid momentum and an edge in what are considered the “battleground” states most likely to decide the election’s outcome, Vice President Harris’ campaign rapidly gained momentum. The race is again considered to be fairly even based on the latest polling.1
The stock market experienced some volatility during this period of electoral tumult, but that’s largely attributable to economic concerns related to a recent disappointing jobs market report. Markets reflected anxiety about the economy's resilience and whether the Federal Reserve (Fed) had delayed interest rate cuts for too long. This is one factor obscuring the capital markets impact of the Presidential race. “The market today is more focused on corporate earnings and the potential for Fed interest rate cuts,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. However, with election season heating up, the outcome’s potential impact might draw greater investor focus.
While the presidential contest’s dimensions have changed, what’s not clear is what the implications could be down the ballot, particularly with House and Senate races that will determine Congressional control.
Along with the headline Presidential race, one-third of the seats in the U.S. Senate (currently under narrow Democratic control) and all 435 seats in the U.S. House of Representatives (currently under narrow Republican control) are also on the ballot this fall. Here, too, a small margin may determine control beginning in 2025, with winners in many closely contested seats difficult to predict. It is conceivable that the election outcome could result in one-party control of both houses of Congress and the Presidency, or a split between the two parties, as exists today.
“A key consideration for investors would be the policy direction of the winning candidate,” says Haworth. “The biggest policy advancements occur when one party controls the White House and both houses of Congress. Based on polls, we’re a long way from that scenario at this point.”
As the November election nears, investors are likely to be more attuned to the potential ramifications of the election’s outcome for businesses, the economy and capital markets. “We need some clarity around key issues to be able to identify potential market winners and losers based on who wins the election,” says Haworth. Candidates will likely draw more definitive policy distinctions as we enter the fall and the campaign becomes more focused. A scheduled September 10th Presidential debate between Harris and Trump is an opportunity to spell out such differences.
Tax policy is one issue beginning to take shape. The most visible discussion centers on what happens to provisions of the Tax Cut & Jobs Act (TCJA), most of which are set to expire at the end of 2025. When passed in 2017, the package represented the most prominent domestic policy initiative of the Trump administration. If the provisions are extended, keeping tax rates lower, as former President Trump proposes, it creates new federal budget deficit concerns from the resulting tax collection reduction. To this point, the Trump campaign hasn’t specified how to address deficit concerns, although it has raised the possibility of additional tariffs on imported goods as a method of boosting revenue (more on tariffs below).1
If some or all provisions of the TCJA aren’t extended, tax rates could be higher for up to 60% of tax filers. Other expiring provisions would impact the standard deduction, child tax credits, and estate and gift tax exemption amounts and tax rates. For corporations, an expiration of TCJA would result in the top corporate tax rate moving from 21% back to 35%.
When still in the race, President Biden called for extending tax breaks for those earning $400,000 or less. At the same time, he proposed that provisions benefiting those earning more than $400,000 be allowed to expire. His plan also backed raising corporate tax rates and implementing a global minimum tax.2 Vice President Harris has not yet specified whether she also supports that approach. In the meantime, Trump recently proposed cutting the corporate tax rate to 20%.3 Both Trump and Harris have also stated support to eliminate taxes on tips for service and hospitality workers.4
Much more discussion and definition around potential tax policy is likely in the months ahead. “It’s still too early for investors to game out exactly how tax issues will play out over the election season,” says Haworth.
Tariffs, particularly those placed on Chinese goods, have emerged as another issue. During his term as President, Trump implemented tariffs, and President Biden continued most of them and recently added more tariffs, reflecting a move away from previous free trade policies. The next President is likely to pursue fiscal stimulus policies to boost the economy, although likely with different combinations of tax incentives and higher spending.
Haworth says party control may have more impact at the sector level. “For example, if Republicans win, there is likely to be more of a push for development of fossil fuels, while a Democratic win might further promote renewable energy development.” Yet Haworth says such policy tendencies don’t always translate into investment outcomes. “Ironically, businesses tied to renewable energy saw their stocks perform better under the Trump administration, while stocks of oil companies and other traditional energy companies have performed better under the Biden administration,” notes Haworth.
An old saying goes that “elections have consequences.” But how do those results influence capital markets? And what are the potential ramifications for you as an investor? To better address this question, U.S. Bank investment strategists studied market data from the past 75 years and identified patterns that repeated themselves during election cycles.
The analysis points to minimal impact on financial market performance in the medium to long term based on potential election outcomes. The data also shows that market returns are typically more dependent on economic and inflation trends rather than election results.
What may be more important to investors is what the parties represent. “Party platforms, which are hammered out at national conventions, often tell the markets more important information than the name of the winner or loser of the general election,” says Haworth. “Investors will try to determine which party is likely to be in power, and how that will benefit particular industry sectors of the market.”
How have election outcomes affected market performance in the past and how might potential scenarios play out in the 2024 presidential election?
U.S. Bank investment strategists reviewed market data going back to 1948. Using average 3-month returns following each election outcome—and comparing those with the average 3-month return during the full analysis history—strategists calculated the statistical significance of the relationship between political control and market performance using a calculation called a t-statistic, or t-test.
A t-test determines whether one group of variables (in this case, the political composition of the White House and Congress) has a measurable effect on another variable (in this case, average three-month S&P 500* returns during the control period).
The analysis also looked at the exact periods of time when parties took control of different branches of government (rather than starting from election dates themselves), although this analysis resulted in similar outputs and conclusions.
Results of the analysis contradict conventional wisdom that a Republican or Democratic “sweep” of the presidency and Congress is most likely to cause market disruption. In fact, historically there has not been a statistically significant relationship between single-party control of both the White House and Congress and market performance.
Rather, the data uncovered three divided-government outcomes with a statistically significant relationship to market performance.
Two scenarios corresponded to positive absolute returns in excess of long-term average returns:
One scenario corresponded to positive absolute returns modestly below long-term average:
While investors may closely monitor election results for their potential effect on stock market performance, it’s important to recognize that other factors that may have greater impact on their portfolios. The historical data suggests that economic and inflation trends, more so than election outcomes, tend to have a stronger, more consistent relationship with market returns.
The historical data suggests that economic and inflation trends, more so than election outcomes, tend to have a stronger, more consistent relationship with market returns.
In general, rising economic growth and falling inflation have been associated with returns that are considered above long-term averages, while falling growth and rising inflation have corresponded to positive but below average market returns. For investors, staying focused on these patterns is probably more insightful than potential election outcomes when it comes to forecasting market performance.
When looking at midterm election data (elections held in between presidential elections), U.S. Bank investment strategists found that the S&P 500 consistently outperformed in the year after midterms compared with non-midterm years. Just like presidential elections, which party controls Congress generally was not a factor in projecting overall equity market performance.
These equity and bond market trends were consistent over time unless there was a dramatic disruption. Read more about how midterm elections affect the stock market.
While the analysis doesn’t point to elections having a meaningful medium-to-long-term market impact, they could affect individual sectors and industries. Different election outcomes have the potential to affect proposed policies, regulations, or global conflicts.
The following are policy issues to monitor throughout the presidential nomination and election process:
In any election, there’s also the potential for delays in verifying an election victor, particularly in closely contested races. At the presidential level, this occurred in both the 2000 election (settled with a Supreme Court verdict) and 2020 election (when the result was challenged by one candidate). In these instances, ensuing delays could lead to more uncertain election outcomes, in which case riskier asset classes might decline until clarity emerges.
Harris and Trump are now officially the major party Presidential nominees. The composition and control of Congress resulting from the 2024 election is still up in the air but is another aspect of this year’s election cycle that bears consideration. It also makes sense to keep an eye on which sectors are most likely to be affected by the potential for key policy changes. Despite the constant headlines revolving around elections, investors are well served to remain focused on factors such as economic growth, interest rates, inflation and corporate earnings when making portfolio decisions.
Stay up to date on the latest market news and activity.
*The Standard & Poor’s 500 (S&P 500) is a well-known, broad capitalization weighted index of U.S. stocks. The index has one of the longest histories amongst U.S. indexes.
Historically, there does not seem to be a clear connection between the outcome of a Presidential election and capital market performance in the medium- to long-term. Two scenarios corresponded to positive absolute returns in excess of long-term average returns – Democratic control of the White House and full Republican control of Congress; or Democratic control of the White House and split control of the Senate and House. One scenario corresponded to positive absolute returns modestly below long-term averages – Republican control of the White House and full Democratic control of Congress.
There doesn’t seem to be a direct link between the occurrence of an election year and market outcomes. The stock market, as measured by the S&P 500, was down in three of the 16 presidential election years since 1960. It experienced negative returns in seven of the 16 non-presidential election years. Typically, other factors such as the state of the economy, interest rates, inflation and corporate profits have a greater bearing on broad stock market performance.
It’s important for investors to avoid anticipating election outcomes, the potential impact of those projected outcomes, or actual election results. Investors should discuss their current portfolio positioning with their financial professional, and determine, by assessing all factors, including changes in personal circumstances and economic and market developments, whether any changes are appropriate.
Explore how capital markets have fared so far under the Biden administration and learn what to expect in the runup to this year’s presidential election.
Up more than 60% from October 2022 through mid-July 2024, the S&P 500 flirted with a market correction in early August.
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