• 2024 is looking to be an extraordinary year, with countries representing more than half of the world’s population holding elections.
• The most important election for markets will of course be the U.S. Presidential election, and primary season is already well underway.
• Historically markets have seen returns in line with long-term averages in Presidential election years, but with a higher probability of a positive return.
• Election years also tend to follow a well-defined trend of early year choppiness, strength through the summer, softness into election day and a rally thereafter.
• We think the above trend is well-correlated to the ebbs and flows of uncertainty as the primary and general election cycle run their course.
• Recent U.S. elections have been tumultuous and 2024 will likely be no different, but interestingly this was not to the detriment of market performance in 2016 and 2020.

We recently came across an interesting statistic that we thought was worth sharing– it is possible that more people may vote in 2024 than we have ever seen before. Nearly 60 countries comprising over half the world’s population will hold elections at all levels of government, some of which will make more headlines than others. While the recent Taiwanese election created some ripples in world media, none of these elections will carry the same impact as the granddaddy of all elections – the U.S. Presidential election, to be held on November 5, 2024. Indeed, the preamble to the big day has already started with the Republican Iowa caucuses held this week and the New Hampshire primary next week. Effectively, the U.S. election season is already in full swing!

Markets tend to do fine in election years…

We bring this up not because we are political news junkies, but because the so-called “Presidential Cycle” has proven to be a helpful guide for market practitioners over time. The table below shows the average return for each year of the cycle, and interestingly, 2023 followed the cycle to a “T”, with strong performance from the S&P 500, in line with history. Election years tend to see performance closer to the long-term average, but we would note they are still the second strongest year after Year 3.

… but tend to have a better “batting average”

Looking at the data above may elicit a “so what” in that election year returns don’t see anything particularly extraordinary one way or the other. That story changes a bit when we look at the “batting average”, or what percentage of the time returns are positive. Over the long term, The S&P 500 and TSX rise about 70% of the time. The U.S. sees a meaningful bump higher in the election years since WW2, with gains 79% of the time, and returns around the long term average as detailed above. If we take out the significant outlier of the Great Financial Crisis of 2008, the average return in both the U.S. and Canada jumps above 9%.

Annual trend during election years follows the rise and fall of uncertainty

While the Presidential cycle tends to follow an ebb and flow of annual returns, the election year itself has seen a repeatable cycle take place, as evidenced below by the similar trends in place whether the start date is 1980 or 1932. We think these trends can be explained by the cycle of uncertainty that surrounds presidential elections. During election years, markets have a choppy start to the year, which correlates with the early days of the primary election season, as we don’t know who at least one of the presidential contenders will be. As we reach the midpoint of the year, markets tend to rally as it is typically clear who is going to prevail in the primaries. This lasts until about a month ahead of the election, at which point uncertainty picks up again, and sure enough, markets tend to correct a bit before rallying into and after the election.

Will this time be different?

One question that many are likely to have is will this year be different given the potential for turmoil as the U.S. electorate seems as divided as ever. It is certainly possible that a heated election campaign and aftermath could introduce short-term volatility into markets, but we would note that both the 2016 and 2020 elections were rather turbulent, with markets gaining nonetheless. While political events can have a short-term impact on markets, it tends to be the outlook for economic and earnings growth that drives returns over the medium to long term.

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