As the 2024 presidential election nears, speculation about the future performance of the market proliferates in financial discourse. Investors, as well as other parties which share an interest in the market, begin to anticipate the effect of the election on market outcomes. Based on their conjectures, investors might prepare their portfolios accordingly, through eliminating, augmenting, and retaining investments; however, doing so would be ill-judged.   

Studies suggest that neither a Republican nor a Democratic victory is intrinsically more conducive to desirable market outcomes; the investor must forgo their partisan affiliation during their probe into the link between the election and market performance.

Given that market outcomes lack a discernible association with the elected party, the examination into the connection between the election and the market must maintain the lens that the election may affect market performance not because of a Democratic or Republican triumph but instead due to the inherent magnitude of the event itself. 

A report from T.RowePrice depicts market volatility in election years versus market volatility in non-election years. The report indicates that in the month following election day, average volatility was quantified at 17.2%, while market volatility for the same period during non-election years was quantified at 16.2%.

The figures reveal that market volatility is, on average, higher during election years than during non-election years. At 1%, this gap in volatility is, however, negligible. Furthermore, according to the same report, in the six months following the date of the election, market volatility was evaluated at 15.6% in election years and 15.9% in non-election years. In this case, for the same period, market volatility was higher in non-election years than in election years.

Although, according to the first set of data points, market volatility during the same period was higher in election years than in non-election years, this difference is not sufficient to evince the supposition that the election escalates market volatility.

Furthermore, even if this 1% gap is deemed substantial enough, election-induced volatility must be only short-term, since, according to the second set of data points, volatility during non-election years exceeded volatility during election years as more time elapsed. Therefore, only two conclusions can be rationalized: either that the market is prone to the election trivially, or that the market is prone to the election for only the short-term. 

To conform to the investor’s cautionary approach is to postulate the short-term effect of the election on the market. Assuming this short-term impact, moreover, encourages a refined investigation into the relationship between the election and the market – specifically in terms of the dynamic between incumbency and market volatility. 

Any presidential election earns its high magnitude due to its perception as a threshold for either “continuity” or “change.” Whereas “continuity” – in terms of the victory of the incumbent party – is typically perceived as an extension of past conditions, “change” – in terms of the loss of the incumbent party – is typically perceived as the onset of new conditions.

Whether past conditions are less or more favorable, the imminence of new conditions inherently induces more uncertainty than the expectation of past circumstances: When the incumbent party prevails – for which there is “continuity” – a recent precedent has been established, decreasing unpredictability and easing uncertainty.

Yet, when the incumbent party loses – for which there is “change” – there is no recent precedent, and both unpredictability and uncertainty rise. Thus, although neither the Democratic nor the Republican party can advertise an inherent advantageousness for ideal market performance, whether “continuity” or “change” materializes impacts market volatility to varying degrees. 

The same report from T.RowePrice sheds light on the dynamic between incumbency and market outcomes by providing data on market volatility under the categories of incumbent party victory versus incumbent party loss from election days throughout 1928 to 2020. According to the report, when the incumbent party lost, the S&P 500’s volatility was quantified at 20.8% in the month following election day, 17.3% in the three months following election day, and 18.6% in the six months following election day.

Alternatively, according to the report, when the incumbent party prevailed, the S&P 500’s volatility was 14.2% in the month following election day, 12.4% in the three months following election day, and 13.0% in the six months following election day. 

For an alternative outlook, in the month following the election, the S&P 500 was 6.6% more volatile if the incumbent party was superseded; in the three months following the election, the S&P 500 was 4.9% more volatile if the incumbent party was superseded; in the six months following the election, the S&P 500 was 5.6% more volatile if the incumbent party was superseded.

Thus, market volatility tends to be higher after an incumbent’s party fails to retain office. This contrast between market volatility after the triumph of the incumbent party versus after the replacement of the incumbent party indicates that, whether a Democratic or Republican victory, the market is more sensitive to the perception of change than to the perception of continuity. 

Nevertheless, as one must recall, the market’s vulnerability to the election is trivial and only short term, if anything, and therefore investors should not react to election day impulsively.