How Elections Impact the Market—And What to Do

With the U.S. presidential elections now under a month away, many investors worry about how potential changes in leadership and policy will impact their portfolios. Election season brings a sense of uncertainty about what might happen to the economy, no matter which party you support. While these concerns are valid, it’s important to remember that elections represent just one factor in the broader economic landscape.

At Larson, we believe in the power of a long-term perspective. Our approach focuses on helping clients navigate periods of uncertainty by staying the course and making decisions based on careful analysis—not short-term political events. We’re here to guide you through these fluctuations and keep you focused on your financial goals, no matter who wins at the polls.

It’s no secret elections can significantly impact stock markets and the broader economy. This relationship is complex and influenced by many factors. Understanding these dynamics can help investors stay grounded and focused on long-term goals rather than reacting to short-term fluctuations.

Stock Market Performance

Presidential election years have historically seen slightly lower average returns compared to non-election years. Since 1950, the S&P 500 has averaged returns of 9.1% during election years, compared to a long-term average of around 10-11%.[i] However, 19 out of 23 election years (83%) since the S&P 500’s inception in 1923 have still provided positive returns.[ii]

Market performance often varies based on specific circumstances. While returns tend to be higher in the lead-up to an election, the 12 months following an election can see more modest gains, possibly due to uncertainty about new policies. It’s also noteworthy that the financial sector has outperformed the broader S&P 500 in seven out of eight years following a presidential election since 1993, reflecting positive earnings revisions and relatively low valuations.

Market Volatility

Additionally, elections typically lead to increased market volatility. In the months leading up to an election, uncertainty around potential outcomes drives market fluctuations. Volatility can increase by as much as 45% between August and October in close election years.[iii] We already experienced some of this volatility earlier this year. And it’s probably not over. Especially in tightly contested races, volatility often peaks during election week. However, once results are finalized, markets tend to stabilize as policy directions become clearer. And despite this heightened short-term volatility, it’s important to note that such swings are generally temporary.

Sector-Specific Effects

Different economic sectors can react strongly to the policies proposed by candidates. For example, healthcare stocks may see volatility if candidates propose major reforms. Energy stocks can be affected by policies around environmental regulation and energy independence, while defense stocks may benefit under administrations that prioritize military spending.[iv]

The Importance of a Long-Term Perspective

While elections can cause short-term market disruptions, their impact on long-term performance is often overstated. Historically, markets have risen over time regardless of the party in power. In fact, a divided government—where one party controls the presidency and another controls Congress—has often coincided with stronger market performance.[v]

At Larson, we emphasize the importance of a long-term perspective. We encourage investors to focus on fundamental economic factors—like earnings growth, inflation trends, and Federal Reserve actions—rather than reacting to short-term political outcomes. Our experience shows that maintaining a steady investment strategy, rather than making drastic changes in response to elections, is often the wisest approach.

How Long-Term Investors Approach Elections

Our Approach

In times of political change and economic uncertainty, it’s natural to feel anxious about what lies ahead. But elections are only one piece of the puzzle. At Larson, we remain committed to providing the steady guidance and disciplined approach to help you stay focused on the bigger picture. Our disciplined process allows us to adjust portfolios thoughtfully, taking an offensive stance when market conditions align, rather than making reactive changes. By maintaining a long-term perspective, we help you ensure your financial goals remain on track—no matter what shifts occur in the political landscape.

And if you have lingering concerns about the upcoming elections that are keeping you up at night, give us a call. We’re here to help you rest easy and focused on your future.

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[i] https://www.fidelity.com/learning-center/trading-investing/election-market-impact

[ii] https://advisor.morganstanley.com/the-ernie-garcia-group/documents/field/e/er/ernie-garcia-group/S&P%20500%20in%20Presidential%20Election%20years.pdf

[iii] https://www.tradersmagazine.com/tech-tuesday/the-impact-of-elections-on-the-markets/

[iv] https://nebraska.tv/news/local/financial-planner-presidential-elections-and-their-impact-on-the-stock-market

[v] https://www.fidelity.com/learning-center/trading-investing/election-market-impact

[vi] https://www.scotiafunds.com/en/home/news-insights/article.us-elections-stock-market.html

[vii] https://www.cnbc.com/2024/10/01/how-to-prep-your-portfolio-for-a-trump-or-harris-2024-election-victory.html