Investors worry about changes in economic policies whenever the presidential election comes around. Studies have shown that elections usually impact investor returns, which explains why traders are concerned with elections. The anticipation of a new government usually leads to market swings and influences stocks, bonds, and forex trading. In this guide, we look at how the U.S. election can affect investors ahead of the upcoming presidential elections.
The 2024 Presidential Election and Impact on Investments
Various unexpected events have occurred in the 2024 presidential race. Many expected a rematch between former President Donald Trump and current President Joe Biden.
The pre-election debate raised essential questions about Biden’s ability to continue to lead the country. After that, a failed assassination attempt on Trump earned him a formal nomination from the Republicans. Days later, Biden dropped out of the race and endorsed his vice president.
Investors are closely monitoring the market situation; lately, there has been minimal impact. From June 27 to July 19, which covered the pre-election debate and Kamala Harris’s endorsement, important stock and bond markets like the S&P 500 and Bloomberg US Aggregate Bond Index increased by less than one percent.
Investors are more focused on the Fed interest rate cuts and corporate earnings, but the November election will undoubtedly impact the investment markets in 2025.
Historical Analysis
The presidential election occurs every four years and impacts a country’s domestic economic and foreign policies, depending on who is elected. Due to this, presidential elections can lead to volatility in the market, whether it’s stocks, bonds, or forex trading. Aside from the policy changes, the election can also cause uncertainty and affect investor sentiment, especially if there is uncertainty about the country’s direction.
Due to uncertainty about the upcoming administration, the trading markets seem to be volatile in the months before an election. For instance, before the 2008 election, the S&P experienced a massive slump. One might credit this to the global financial crisis, but investors were also uncertain about the new government’s ability to handle the crisis.
A similar situation occurred during the 2016 election. The Dow Jones Industrial Average dropped significantly when the results started to favor Donald Trump as the next president. It recovered and surged in the next few days as investors looked forward to advantageous business policies.
According to studies from the U.S. Bank, the stock, bond, and equities markets usually have a muted performance in the months leading up to the election. For instance, bonds deliver an average of 6.5% before the presidential election, unlike the 7.5% they usually offer.
Also, the party elected to the presidency can influence the market. The study showed that stock market returns stay at an average of 5% when a new party is elected. Still, if the same president was elected or the party retained its presidency, the average returns are slightly higher at 6.4%.
Impact of the Presidential Election on Investments
Different election outcomes can disturb the stock, bond, and equities markets. For instance, there are significant changes in the market when the government changes from one political party to another. In 2016, there was a spike in markets because the election produced a Republican president and Congress, as investors were expecting tax cuts and deregulation.
This was also an unexpected market event, which can cause the market to become sensitive. In 2016, the elected winner was unpredictable, which caused an instant and significant change in the market.
If the presidency stays in the same party, significant changes in the makeup of Congress might affect the market. If Congress is evenly split or dominated by the opposing party to the president, it will be easier to execute economic policies. This can cause investors to become uncertain.
Tips and Strategies for Investors During Elections
Different strategies can help investors who want to protect their funds as the presidential election fast approaches.
Diversify Your Investments
For one, it’s essential to diversify. Diversification is not only good for election time but is generally a fundamental strategy in trading. Investors can reduce risk by spreading across different locations, sectors, securities, and asset classes. So, loss in one aspect is balanced out by gains in another.
Hedging
Consider hedging to protect yourself from election-driven losses when investing. Hedging involves investing in financial products like inverse ETFs, options, or futures. These usually protect your portfolio from loss because the value rises while the underlying asset falls. This is a good strategy if you’re expecting changes in the government or legislature.
Invest in Defensive Sectors
Consider investing in defensive stocks or sectors. These are more stable in times of uncertainty. Some of these sectors include healthcare, utilities, and consumer basics. They are usually less affected by changes in politics or the economy.
Focus on Long-term Returns
During election times, it’s easy to be controlled by your emotions and give into the panic. Instead, it’s best to focus on long-term gains, as the market usually recovers after the uncertainty surrounding the election fades. Reacting too fast to short-term changes can affect your investments.
Navigating Your Investments During Election Season
Historically, presidential elections have led to higher market volatility and investor uncertainty. Now that the 2024 Presidential Election has been unpredictable, it has already led to some uncertainty among investors, and it’s expected to continue. Still, it’s essential to build a diversified portfolio and avoid getting influenced by short-term election-related changes.
