Understanding the U.S. election and its impact on investments

The U.S. presidential election, held every four years, is a major global political event and a hot topic closely followed by investors.

For instance, in election years, the stock market often speculates on candidate-related stocks. In 2024, Trump made a comeback, making the 'Trump trade' a key theme throughout the year. Similarly, with Harris succeeding Biden as the Democratic candidate, the market has started to buzz about the 'Harris trade.'

What are the key upcoming milestones in the election? How will they impact the market? This article aims to answer these questions.

U.S. presidential election process

The U.S. presidential election spans nearly a year and involves six key stages:

I. Primaries and Caucuses:

Primaries and caucuses begin in January and February, where voters select their preferred candidates.

For example, on January 15, 2024, Trump won the Iowa Republican primary, quickly gaining party support.

II. National Conventions:

After the primaries, major parties hold conventions to officially nominate their presidential and vice-presidential candidates.

On August 22, 2024, Kamala Harris was nominated at the Democratic National Convention in Chicago.

III. Presidential Debates:

Candidates engage in debates from September to October to present their policies. These debates are crucial for the final stretch of the campaign.

In 2024, the first debate was unusually early, held on June 27, and featured Biden and Trump. Biden later withdrew from the race after that.

IV. Election Day:

Scheduled for November 5, 2024, voters cast their ballots, and the candidate with the majority in each state wins all of that state's electoral votes.

For example, the candidate who gains the majority in California will receive all 55 of its electoral votes.

V. Electoral College Vote:

The U.S. president is officially elected by the Electoral College, which casts its votes in December. Since electors follow their state's popular vote, this step is mostly ceremonial.

There are 538 electoral votes in total, distributed across the 50 states and Washington D.C. A candidate needs a majority to win the presidency.

VI. Inauguration:

The new president is sworn in on January 20 of the following year.

How do elections impact the market?

Many investors are curious about how elections affect the market. Let's explore this from two angles: seasonal trends and party control.

I. Seasonal Trends:

Elections can influence monthly market performance. As Election Day approaches, market volatility usually increases, leading to weaker stock performance.

According to Bank of America, the market often dips in September and October before the election, then rebounds in November and December.

However, on an annual basis, elections don't significantly impact.

Data from JPMorgan shows that since 1928, the average annual return of the S&P 500 during election years is 7.5%, compared to 8% in non-election years, showing no substantial difference.

To get a clearer picture of the influence after the election years, we need to consider the results of the concurrent congressional elections as well.

II. Party Control

The party that controls the House or Senate can influence policy implementation by the next administration.

The chart below illustrates the average annual returns of the S&P 500 under different combinations of presidential, Senate, and House party control.

No matter which party's candidate wins the presidency, the market generally tends to rise on average. This is due to the long-term upward trend of the U.S. stock market, so investors need not overly worry about who takes office.

However, congressional election outcomes can impact the market. Data shows that when Democrats control both chambers of Congress, the average annual return of the S&P 500 is lower than in other years, regardless of the president's party.

How do different sectors perform in election years?

While presidential elections may not significantly impact the overall long-term performance of the stock market, they can create winners and losers among specific sectors. This is because presidential candidates often have clear stances on certain industries, which can lead to increased market volatility. For example:

Energy: The two parties have distinct policies regarding fossil fuels and renewable energy, making this sector highly sensitive to election outcomes.

Healthcare: The significant differences in healthcare policies between the parties can cause large swings in stock prices within this sector.

The chart below shows the performance of various industry sectors during election years since 1976.

From the chart, we can see:

- Energy and communication services often outperform the S&P 500 in election years, while healthcare, materials, and technology usually underperform.

- The winning party might have little effect on sector performance.

For instance, energy outperformed in 5 Republican and 3 Democratic election years, while healthcare underperformed in 5 Republican and 4 Democratic election years.

Final thoughts

While historical data offers insights, each election is unique and uncertain. We should continually assess its market impact.

For sector-specific insights, check out our 'Trump Trades' and 'Harris Trades' courses.

Remember, election impacts are often short-term. Ultimately, stock prices will reflect how new policies affect the economy and corporate earnings.