The US Presidential election is less than a month away and the polls and the betting markets make it clear that this is going to be an edge-of-your-seat nail-biter. It is just too close to call whether Donald Trump or Kamala Harris is going to be able to claim victory – and it may take days after the election before an official victor is declared. It is often said that financial markets don’t like uncertainty. So why — at a time of elevated geopolitical tensions and rising unemployment — have we seen the S&P 500 and the TSX rise 21% and 15%, respectively, this year ahead of such an unclear election outcome?

First, perhaps there is less uncertainty than there appears. While it is very uncertain who will win, the policies of both candidates are well understood. We have already seen what four years of a Trump presidency would look like. And Harris’ policy stances are not far from those of Joe Biden. While many investors may not agree with the platforms of one candidate or the other, financial markets are likely recognizing that control of Congress is likely to be split between Democrats (House of Representatives) and Republicans (Senate). Divided power should filter out more extreme pieces of legislation. (One caveat is that Trump’s plan to impose high tariffs on imports will not need to be approved by Congress.)

Importantly, neither candidate appears inclined to reign in the government’s deficit problem. While this kicks the proverbial can down the road, it is positive for near-term economic activity, which is sometimes the focus of some investors. The country’s high debt level will have to be tackled by some future administration.

Don’t Believe the Hype

Ahead of many elections there are partisan warnings that the stock market or economy will crash under the leadership of one candidate or another. Such bold assertions were made loud and clear during Trump’s 2016 campaign and once again in the lead up to Biden’s 2020 victory. The below chart, however, strongly challenges such doom and gloom proclamations. It shows how the S&P 500 Index performed following the election of both candidates. Stocks did just fine under each president, which suggests that the president has less of an effect on stocks than some people believe (or fear).

Macroeconomics Outweighs Politics

Outside of politics, there are macroeconomic factors that have helped lift stock prices. First, inflation has eased, which has led many central banks to start reducing interest rates. The US Federal Reserve, for example, cut its benchmark rate by 50 basis points in late September. This was the first of what is expected to be a series of rate reductions. Since 1970, we have seen 10 rate-cutting cycles by the US Federal Reserve. In only three of those 10 rate-cutting cycles did stocks fall in the 12 months after the first rate cut. In those cases, the global economy was facing major challenges (1981 inflation-induced recession; 2001 recession and 9/11; 2008 financial crisis). In the other seven rate-cutting occasions, stocks rose an average of 18%. With most economists seeing low risks of a recession over the next twelve months, investors appear to expect stock prices to rise as interest rates decline.

More Tailwinds than Headwinds

One of the market’s key headwinds is that after the strong run over the past year, stock valuations are not cheap. But this can be resolved either by stocks pulling back or by earnings catching up to stock prices. This risk can also be mitigated by having a portion of a portfolio allocated to stocks with lower valuations.

Overall, the stock market has several tailwinds in its favour including the fact that stocks usually rally in the months after a US presidential election (see the left side of the above chart), stocks also tend to rise when the US central bank is cutting interest rates, and the US economy appears to be able to avoid a recession. As such, while global political events can cause understandable concerns, when it comes to their portfolios, we remind investors that these issues tend not to have a lasting impact on stock prices. No troublesome political ideologies, global conflicts, or even pandemics have had a permanent impact on the long-term trajectory of the stock market.

If you have any questions, please do not hesitate to Contact us!