The Stock Market’s Election Year Enigma: Will AI’s Reign Continue or Will Politics Take the Lead?
The stock market has been on a tear this year, fueled largely by the excitement surrounding artificial intelligence (AI). However, as the upcoming U.S. presidential election draws closer, the political landscape is set to play a more prominent role in shaping market performance. With the campaign cycle already in full swing, and the potential for significant policy shifts, investors are closely watching the political scene and its potential impact on the markets.
Key Takeaways:
- AI is a major driver for the stock market in 2024, but the upcoming election could shift the focus to political uncertainties.
- Historically, the S&P 500 has averaged around 7% returns in election years, with financials and energy sectors typically outperforming.
- This year’s market performance is already diverging from historical trends, with the S&P 500 already exceeding typical election-year gains and sectors like technology and healthcare exceeding historical averages.
- The "90-day rule" suggests that the stock market may offer hints about the election outcome, with a strong market suggesting incumbent party victory.
- Investors are advised to avoid making drastic portfolio adjustments based solely on election-related speculation, as market trends can shift rapidly and unexpected outcomes are possible.
A Historic Election Year
The 2024 presidential election cycle has already seen unprecedented events. The initial frontrunner for the Democratic nomination, President Joe Biden, withdrew from the race after a disappointing debate performance, leaving Vice President Kamala Harris as the presumed nominee. This development has introduced a new element of uncertainty into the election, as Harris’s policies and potential impact on the economy remain largely unknown.
The Impact of Policy Shifts
The possibility of a change in administration always brings about concern about policy shifts that could impact specific sectors. In particular, the healthcare sector has historically underperformed in election years due to political discussions around topics like drug pricing. However, this year, healthcare has actually outperformed its historical average, highlighting the unpredictable nature of the market’s response to political events.
The AI Advantage
While politics will likely play a more significant role in the coming months, the current market euphoria surrounding AI is likely to persist. The S&P 500 has already reached all-time highs, driven by the potential for AI-powered innovation to boost corporate profits. This positive momentum is likely to continue in the near term, but the election could potentially introduce market volatility.
The Three-Month Rule
Historically, the stock market has exhibited a strong correlation with presidential election outcomes, particularly during the final three months before Election Day. The so-called "90-day rule" suggests that a declining market during this period may indicate a loss for the incumbent party.
This trend has been observed with 83% accuracy in the past century, according to data from Strategas. However, it’s crucial to note that past performance is not necessarily indicative of future results.
The 2016 Cautionary Tale
The 2016 presidential election serves as a stark reminder that market predictions can be flawed. Despite strong polling data that suggested a clear victory for Hillary Clinton, the market experienced a significant downturn in the final week leading up to Election Day. This underscores the high volatility inherent in election years and the potential for unexpected outcomes.
Navigating Market Turbulence
Investors are advised to exercise caution and avoid making drastic portfolio changes based solely on speculation about the election outcome. While it’s important to stay informed about potential policy changes, relying on short-term market predictions can be risky.
Instead, investors should focus on long-term investment strategies and diversifying their portfolios across different asset classes and sectors. This approach can help mitigate risks and potentially navigate market volatility during an unpredictable election year.
What to Watch For
The coming months will likely bring even greater scrutiny of the political landscape and its potential impact on the stock market. Key factors to watch include:
- Policy pronouncements from the presidential candidates: Each candidate’s stance on issues like taxes, healthcare, and trade could influence market sentiment.
- Economic indicators: Data on inflation, GDP growth, and unemployment will offer clues about the health of the economy and potential policy shifts.
- Market volatility: As the election draws closer, expect increased market volatility as investors adjust their portfolios based on changing political dynamics.
The upcoming election will be a significant event for the stock market, and navigating its potential impact requires a balanced approach. Investors should stay informed about potential policy changes and market trends, while maintaining a focus on long-term investment goals.
