Investors are focused on whether the Federal Reserve (Fed) will continue to be able to pull off a soft landing from the high inflationary environment experienced post-Covid. Up to this point, inflation has been the focus of investors, as higher interest rates implemented by the Fed tend to slow our economy and inflation. The overall market has remained resilient with the S&P 500 index posting new highs, but we have elections looming later in the year. This political event usually brings concerns to investors on the future direction of the markets.
The following slide from Dimensional Fund Advisors shows how the S&P 500 has performed during presidential terms since 1928:
Looking at the results, there are only 16 presidents over this time frame which is a very small sample size. Of these terms, there were only three which posted negative results (Hoover: Great Depression, Nixon: Oil Crisis, and Bush: Great Recession). Ignoring these outliers, we observe little differences in how the markets perform based on the political party elected.
When looking forward to November, we believe the Congressional election could have a more of an impact on how the market performs than the election. The Tax Cuts and Jobs Act of 2017 is set to expire at the end of 2025, which would change several key provisions of the tax code (income tax rates, deductions, etc.). We expect this could impact future market returns, depending on whether Congress acts to extend these provisions, allows them to expire, or change them to new regulations.
At the same time, we must anticipate the possibility of increased volatility as the election draws near, as many investors try to use this event as a catalyst for large stock market moves (either to the upside or the downside). Instead of trying to predict how the election will influence future returns, which are often impacted by world events as opposed to our president in office, we continue to believe the best course of action for investors is to remain committed to their overall investment plans.