Did you know that the market has correctly predicted the winning presidential party 20 out of the last 24 times? In this episode of Coffee with Waymark, we explore a recent LPL report on the 2024 election, which provides insights into the stock market's historical accuracy in predicting outcomes, as well as the expected volatility tied to election cycles, with key sectors potentially impacted by the results.
Key Points Discussed:
The role of tax policy and its dependence on Congress
Stock market’s historical accuracy in predicting elections
Election year volatility trends
Potential impact of the 2024 election on bonds, stocks, and key sectors
Tax policy’s role and its dependence on Congress
Transcript:
Hi and thanks for joining me on another Coffee with Waymark. On today’s episode we are going to take a look at a white paper that LPL recently published, which I think has some really, really fascinating tidbits about this upcoming 2024 election. Let me start sharing that right now, and I'll walk you through the parts that I found most intriguing and enlightening.
Let's start here. This is just the cover of the title page. This is something that I'm sure all the CNNs and Fox News of the world will highlight ad nauseam because they love using their little finger pointers and moving the charts and graphs around. But ultimately, you can see where the electoral votes look like they are right now, with 93 in the middle, what we call the swing states.
The next page is just a timeline of how crazy the 2024 election season has been, everything from Joe Biden dropping out to the debates, all the way through January 20th, which will ultimately be the inauguration and, hopefully, a peaceful transfer of power.
This here talks about the fact that the U.S. stock market has actually been quite accurate in predicting the future president. It shows that 20 out of the last 24 presidential elections have been accurately called, with the incumbent party winning when the stock market is positive. As of today, October 1st, we have a positive market, which is a good sign for the incumbent party, i.e., Vice President Harris. However, there have been four times where the stock market was not accurate in predicting the winner, and you can see those instances here: one in the 1950s, one in the 1960s with Nixon, in 1980 with Ronald Reagan, and most recently, with Joe Biden. But overall, the stock market has been right 20 out of 24 times.
The next section discusses how volatility is higher in an election year. We use a metric called the VIX to measure volatility. In a typical year, which is represented by the blue line, volatility tends to increase or decrease throughout the year, with small spikes around March/April and September/October. But in election years, represented by the orange line, you see larger spikes during these same periods. No surprise there, but it shows that every four years, volatility spikes, particularly around presidential elections. This makes sense, as the stock market does not like uncertainty, and when the leadership of the most powerful country in the world could change, that impacts a lot of things. This year, every House of Representatives seat is up for grabs, along with several Senate seats, so there’s additional uncertainty contributing to the volatility.
The stock market tends to perform well after an election, once the uncertainty is resolved. Once a president is elected and installed, the transition of power typically happens quickly, and the market stabilizes. Of course, there have been exceptions, such as the 2000 election with Bush and Gore, where it took a few months for the results to be sorted out, leading to increased market instability during that time.
One section of the paper discusses how bonds tend to perform well when the stock market is volatile. Bonds are not perfectly correlated with stocks, meaning when stocks go down, bonds often go up. With interest rates coming down, bond prices could rise, making bonds an attractive option for investors concerned about volatility. There’s a full page in the white paper about whether to increase your bond exposure in this environment.
This next chart offers an unbiased comparison of how Republicans and Democrats view key election topics like China, immigration, energy, and taxes. The paper also examines which market sectors would perform better under different administrations. The final section focuses on tax policy, emphasizing that the president does not act independently of Congress. So while Harris and Trump may campaign on various tax proposals, there’s no guarantee those policies will be enacted without congressional approval.
The paper wraps up by suggesting that while volatility increases during election seasons, long-term investors should avoid making major shifts in their asset allocation. If you're a long-term investor, there's no need to react drastically to the election-related volatility.
Overall, I thought this was an excellent piece that LPL put together, especially for those who follow politics closely. It’s a very interesting read.
Thanks for joining me on this Coffee with Waymark, and remember to be well and do good. Thank you.
Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.
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The opinions voiced in this video are for general information only and are not intended to provide specific advice or recommendations for any individual.
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