Market Commentary | Markets Don’t Care About Elections

According to data from Bloomberg, the average annual price return of the S&P 500 in election years is 7% vs. 10% in non-election years. We also see that the average S&P 500 volatility in election years is 14.8% vs. 14.1% in non-election years. This makes sense as markets do not like uncertainty, so during the “wait and see” period leading up to November, markets tend to have lower returns and higher volatility. With the S&P 500 up more than 20% year-to-date, we can see that markets care even less this time around. The primary drivers of stock market returns will be the state of the economy, the direction of company fundamentals, and where we are in the business cycle.

The most important piece of advice that we can give during these times: stay invested and don’t let emotions have a strong impact on your decisions . Time in the market is more important than timing the market.

So now that we know to stay invested, what do we think will happen?

We do not have a crystal ball to help predict the general election result; our guess is as good as yours. If you believe the polling figures (from RealClearPoltiics) Kamala Harris has a 1.5 point lead nationally and all of the battleground states are toss-ups. If you believe the betting markets (according to PredictIT), Trump has a 60% chance of winning. In the House, Republicans currently have control, but 27 seats are a toss-up. In our view, they are likely to go to same way as the presidential election as we see more and more that voters are choosing the same party down-ballot. Based on current races, we would give the Democrats a slight edge to take control. In the Senate, Democrats currently have a 51-49 seat majority, but of the 34 seats up in 2024, 23 are held by Democrats or Independents. Based on key senate races today, the Republicans have a much easier path to control as West Virginia is likely to go red and they would need to lose many of the races they are currently leading (Rick Scott in FL, Deb Fischer in NE, Ted Cruz in Texas, and Tim Sheehy in MT.)

We think the likely result, and the one that markets will initially react to best, is split control. If that’s the case, we think there is little to change from a portfolio positioning standpoint. However, if we get a sweep one way or another, we believe that are some areas of the market that may stand to benefit.

Here are the possible impacts we see based on the proposed policy of candidates and full control (sweep):

Fiscal Deficit – Under a sweep by either party, we expect a rise in the deficit. Under Democratic control, we expect spending to rise. Under Republican control, we expect tax revenues to fall as a result of the extension of the Tax Cuts and Jobs Act.

Taxes – We expect lower personal and corporate taxes under a Republican sweep.

Trade Policy – We expect higher a higher tariff regime (especially on China) in the instance of a Republican sweep. Under Democratic control, we expect the current tariffs to stay in place, with a possible expansion of the CHIPs act.

Energy Policy – Under Republicans, we expect increasing US oil drilling and policies supporting US oil, while with Democrats, we expect support for clean energy policy and electric vehicles.

Defense – Regardless of who is in control, we expect tailwinds/support for the US defense sector.

Regulation – We expect more regulation under Democratic control, primarily impacting technology and financial services firms. Under republican control, we expect less regulation and more crypto-friendly regulation.

As always, please reach out to you financial advisor with any questions or concerns.

-The Seventy2 Capital Team
Commentary and Research provided by:
Michael Levitsky, CFA®, CAIA® - Managing Director, Investment Strategy