Election Year Investing: Who Will Win?

By TradeSmith Research Team

Listen to this post
Depending on your view, I come bearing great or terrible news.

We are one year, two weeks, and one day from Election Day. Millions of Americans will line up to vote, or mail in, their personal preference for the next president. Then, roughly half the country will bemoan the result.

Personally, I’d bet a golden retriever could do a better job than any president has in the past several decades – dogs best align with my key principles of being pro-free markets, anti-war, and fun-maximalist – but that’s neither here nor there.

What I’m saying is I have no dog in this political race. I’m much more interested in the investment story – as we all ought to be. After all, it’s got just as much of an impact on our day-to-day, if not much more.

Election years are prime study material for seasonal investing strategies. There are discernible and tradable trends that happen in the lead up to every election. And, as the campaign ads and bitter rhetoric begin to ramp up, we should soon start seeing those trends manifest.

What can we expect, and how can we trade it?

Here’s how I’m casting my vote…

Donkey Markets vs. Elephant Markets

Let’s get to the fun stuff right up front.

There have been 24 presidential elections since 1928 including Depression-era President Herbert Hoover. That’s seen 11 Republican victories and 13 Democrat victories.

Per research from Morgan Stanley (and adding data from 2020), markets rise an average of 11.59% during an election year, no matter who winds up winning. That’s the good news. There is a clear and strong upward bias on election years, independent of party. Right away, we know we should be bullish going into 2024.

The average return for every year since 1928 is 9.9%. That means election years are about 17% more bullish than the long-term average.

Matter of fact, there were only three years of negative returns. Roosevelt’s victory year in 1932, down -8.2%…, his third victory in 1940, down -9.8%… and Obama’s first victory in 2008, down -37%.

Republicans can celebrate – they have had just one election year stock market loss.
And this is really where things get interesting…

Democrat-winning years actually tend to drag the returns down. Including 2020, the average return during Team Donkey years is 8.4%. When Team Elephant takes it, returns jump to 15.2%.

With this in mind, we can potentially, kinda-sorta predict who the next president will be based solely on S&P 500 performance.

Say the S&P jumps 10% before election day next year. That’d be a pretty good signal that Republicans are set for victory. Investor confidence would be speaking loudly in their favor.

If we put in a number something shy of that, say 6%, we might want to start banking on an incumbent win.

Is that an exact science? Not even a little bit. But regardless, we should sit comfortably knowing that election years tend to bring good tidings.

You want to buy quality stocks going into next year. And, really, you should look at the last week’s 3% loss in the S&P 500 as a gift horse with solid gold teeth.

But be discerning. Buy well-established, capital-efficient companies that are light on debt and heavy on cash. (Expect some notes on cash-rich companies this coming week in the Daily.)

In summary…

The best time to get ready for a bullish 2024 is yesterday.

The second-best time is right now.

And I know just the way to do it.

Get An Edge on a Bullish ’24

No matter what election year brings, we can be sure it won’t be like any election year that came before.

We’re dealing with still-pretty-high inflation… A stubborn bearish bias… Exploding Treasury yields (look out for tomorrow’s Daily for an idea on that)…

And now there are not one, but two major geopolitical conflicts straining taxpayer pocketbooks.

Oh, AND, did you see mortgage rates are at 8%, credit card balances are at all-time highs, and savings rates are plunging?

With all this in mind, the one thing I can guarantee is weirdness. And the best antidote to weirdness is a solid set of trading tools to stay ahead of it all.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily