Election year rally: Is it already priced in?
Investors who are hoping for a strong rally in the stock market leading up to the 2024 U.S. presidential election may be in for a disappointment. Historical data shows that the S&P 500 tends to see an average total return of around 10% in presidential election years. However, the benchmark index has already rallied significantly in the months leading up to the end of last year. This suggests that the pre-election gains may have already occurred, according to Saira Malik, chief investment officer at Nuveen. This raises concerns for equities coming into the beginning of 2024.
Concerns about volatility and interest rates
In addition to the already realized pre-election gains, Malik highlights other reasons for concern about the stock market in 2024. One of these reasons is the tendency for increased volatility in election years. Another concern is that investors may be pricing in more interest rate cuts by the Federal Reserve than are likely to be delivered. Furthermore, stocks are trading at high valuations, with the S&P 500 currently at a 20% premium to its average valuation since 2010. These factors contribute to the overall cautious outlook for equities in 2024.
Political backdrop and market volatility
The highly contentious nature of the 2024 presidential election adds to the apprehension in the market. Former President Donald Trump, who is currently the front-runner for the Republican nomination, is facing various legal challenges and has been indicted in multiple cases. On the other hand, President Joe Biden’s approval ratings, including within his own party, have been low. The rise in concerns over U.S. political dysfunction and the potential for a contested election result further contribute to the possibility of higher market volatility.
Historical market performance and election outcomes
The performance of the stock market leading up to an election has often been seen as a reflection of the economy and a key factor in predicting a candidate’s prospects. Incumbent presidents who manage to avoid a recession in the two years before their re-election have historically gone on to win a second term. Conversely, presidents who experience a recession in that period have typically lost their bid for re-election. Additionally, the direction of the S&P 500 in the three months leading up to an election has often telegraphed the election outcome.
Playing defense in a volatile market
Given the potential for increased volatility and cyclical risk in the market, focusing on defensive strategies may be prudent. Nuveen recommends investing in dividend-growth stocks, which are companies that have consistently raised their dividends over time. These stocks have historically weathered down markets relatively well. Additionally, investing in global infrastructure plays may also be beneficial, as trends favoring reshoring and supply chain changes are expected to continue to benefit these companies.
In conclusion, while there is a historical pattern of stock market rallies in presidential election years, the significant gains already seen in the months leading up to 2024 raise concerns about the potential for further gains. Increased volatility, uncertainty surrounding the election, and the already high valuations of stocks add to the cautious outlook. Defensive investment strategies, such as focusing on dividend-growth stocks and global infrastructure plays, may be prudent in navigating the uncertain market conditions.
Analyst comment
Neutral news
As an analyst, I predict that the stock market may not experience a significant rally leading up to the 2024 U.S. presidential election due to already realized gains and potential concerns. Increased volatility, uncertainty in the political landscape, and high stock valuations contribute to a cautious outlook. Defensive strategies, such as investing in dividend-growth stocks and global infrastructure plays, may be advisable in navigating the market.
