How do Election Cycles Impact the Market? [Video]

Every election year, people worry how the candidates will impact stock market returns. In this video, we talk about historical election cycles, domestic and global markets reactions to the 2024 election, and what we might see over the next four years. Transcript below!

Historical Election Cycles

Michelle Smalenberger, CFP®
All right. Well, I know you’ve written about this, but just kind of remind us how do elections typically impact market performance.

Rob Stoll

Yeah, definitely. So I’ve done a lot of work on this and, you know, just looking back in history. If you think about first term presidents, the way stock markets usually work is you have decent returns in years one and two, but year three tends to be a really, really good year if you look back over all the first terms in history, or at least over the last hundred years or so. And then usually the election year, year four, it can be mixed. It’s generally still good in line with averages, but generally it’s kind of mixed. And this year, I mean, it has been a banner year all the way around. S &P is up like 25%, which is way above kind of a normal year. And even the lagging parts of the market, like mid cap stocks, small company stocks are up mid-teens, emerging markets are up kind of 12, 13 percent. So I mean, there’s been a lot of gains all the way around this year. Bonds are up, but not really as much as what I was hoping. yeah, mean, generally we’ve gotten kind of a really good year, which kind of sets things up interestingly for this, you know, what could be termed a second term of President Trump.

Michelle Smalenberger, CFP®
Yeah, yeah, it’s interesting because the terms aren’t running back to back. So it’s kind of one term and now coming back. So it’s interesting. can almost do you feel like it can almost feel like another first term in that sense.

Rob Stoll
It could, yeah, it could, but I mean, just the dynamics of a second term, you know, he can never run again. So it’s kind of, you know, we’ll get into it in a little bit, but, you know, a little bit of a lame duck scenario. you know, there is that, but because, you know, there was a term, there was a different precedent between his first term and second term. There is definitely a different flavor to this second term than we’ve seen really.

Michelle Smalenberger, CFP®
Yeah.

Rob Stoll
I came to like the 1800s maybe so yeah.

Domestic and Global Market Response to the 2024 Election

Michelle Smalenberger, CFP®
Well, I guess kind of so knowing like historically kind of what and this is probably everyone’s reminder. Stay invested regardless of who is in the White House. Stay invested because markets do over time move higher, but kind of walk us through what’s happened since.

Rob Stoll
Yeah, so the market has reacted very strongly to this, at least here in the US. So if you look at the S &P, mid cap stocks, small cap stocks, I mean, there’s been a very broad based rally the last couple days. And I think that really stems from because Trump won with a GOP Senate and likely a GOP house, the prospect of Tax cuts is certainly a lot higher than what it would have been if Harris would have won. So there is hope. If you go back to 2016 when Trump won and passed his tax reform, that was a very meaningful boost to company earnings and stock prices are kind of based on earnings and fundamentals. So if people believe that those earnings are going to be higher than what they would have been, then stock prices will go up.

Rob Stoll
We’ve seen a little bit of that in the U.S. The international has been a little bit different. It’s been, know, yesterday, well, Wednesday was not good for international for developed markets or emerging markets. Yesterday was a little bit better. Today, Friday, November 8th, it was it’s not looking so good. And, you know, again, I think that’s because the market is pricing in.

Well, what does a Trump administration mean for trade tariffs and protectionism and, you know, kind of trying to move manufacturing back to the U.S., which has to come from somewhere. So, you know, you’re seeing just a lot of, you know, I’d say not great stock market returns the last couple of days in international. You know, if you look back to 2016, we saw very similar dynamic and I kind of turned around right afterwards. So I don’t want to read too much into that. But you know, that’s kind of the initial market reaction.

What Do We Expect to See in the Markets?

Michelle Smalenberger, CFP®
Yeah, yeah. It’s interesting when it moves so much so quickly. Like you said, this year the market has done really well. So then to have I think it’s been the best week of the year in these last few days. That makes a really big, really big difference on top of an already good market. So yeah. So I guess when you kind of look ahead, thinking forward, how do what do you kind of expect from the market kind of under a Trump presidency over the next two, three, four years?

Rob Stoll
Yeah.

Michelle Smalenberger, CFP®
kind of global markets, maybe let’s start there. What do you kind of expect? Kind of more of what we’ve already seen in the first week.

Rob Stoll
Yeah, yeah. So, you know, kind of looking outside the US to start, I do think it’s it is challenging. I’m not going to lie. It’s Europe was looking good over the last couple of years. A lot of their slow growth problems were at least temporarily relieved. But they they really they’re having a lot of problems. And it’s kind of sad, to be honest. You’re seeing Germany is really their industrial base is getting hollowed out. And, you know, that’s a quarter of the European economy right there. And it’s they’re having a lot of issues. The Ukraine, Russia war certainly has hurt them because they’re very dependent on natural gas prices. And that’s been at least a little bit in twenty two and in twenty three was a big problem. So, you know, I would say kind of Europe, I kind of look at that and I’m like.

I don’t know, that’s not looking too good, particularly if Trump is more protectionist, even against our European partners. Other parts of the developed market world, Japan, I think will be fine. They’re kind of under the radar. They’ve been doing a lot of the right things. I think their economy is a little bit better positioned to kind of take advantage of protectionism, if that is going to happen here in the US.

Rob Stoll
And then some of the other markets like Canada and Australia are probably going to be fine. They’re resources driven and you know, we’re, still need a lot of resources to kind of power the economy. So, you know, that’s that emerging markets. The big question is what is China going to do? What is that going to look like? And, you know, we have in our models of structural underweight in China because, you know, frankly, they just grew too big, too fast and are going to have to digest this.

They’re trying to reform a little bit, but having Trump in office is really going to make life difficult, I think, for China. So China is going to face a lot of hard choices. They don’t have a lot of room to maneuver. you know, as much as the U.S., you know, and I’m a big believer in diversification and investing internationally and whatnot, but I mean, it really is when you kind of just look at the cold hard facts.

Rob Stoll
The US just looks so much more attractive than a lot of these other areas right now. And I mean that was the case before Trump was elected, but even more so after.

Michelle Smalenberger, CFP®
Yeah, yeah. No, I think that’s really helpful though, just to kind of dive into and see. that, yeah, that’s really helpful. How have markets kind of performed under similar administration?

Related Links to this Video

Listen to our full conversation in episode 55, “What the Election Means for Your Money.” Find it by streaming the Behind the Designs podcast.

If you have more questions, then reach out! We specialize in complexities like executive compensation, tax planning, and investment management. Our team would love to see how we can help bring confidence to you and your family’s finances.

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