Election Week Brings Bullish Sentiment with Some Caution
The stock market traditionally leans bullish during U.S. election weeks, though the impact varies. Since 1928, the S&P 500 has risen by an average of 0.7% in election weeks, gaining ground 63% of the time, according to Birinyi Associates. However, the latter half of the week often sees more volatility, with an average drop of 0.4% from Tuesday to Friday and a success rate of only 58%.
Despite the potential for increased volatility, historical data suggests investors may benefit from small gains during this period.
Election Day Trends: Mostly Positive for the S&P 500
Election Day itself often yields positive results. Of the past 10 elections, eight saw the S&P 500 rise on Election Day, delivering an average gain of 0.9%, per CFRA Research. This data implies a short-term, election-day boost, although it is important to note that prior to 1984, U.S. stock markets remained closed on Election Day.
The Dow Jones Industrial Average (DJIA) futures and the S&P 500 Index maintained their modest upward trajectory early Tuesday, with investors watching for potential election-day gains.
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Impact of Economic Conditions Over Presidential Terms
Market performance during election weeks reflects a short-term response to political events. However, a president’s term is more influenced by economic conditions. Nasdaq Chief Economist Phil Mackintosh notes that market returns are more affected by whether a recession occurs during a president’s tenure. Average four-year returns of the S&P 500 hover around 30% during terms marked by a recession, while non-recession periods average a 62% return.
This trend holds regardless of whether a Democrat or Republican occupies the White House, as the health of the economy and corporate earnings appear to be the primary market drivers.
Market Outlook for the Fourth Quarter: Earnings Growth Remains Promising
For the remainder of the year, corporate earnings and economic resilience will shape stock performance more than the election itself. Third-quarter earnings have shown strength, and fourth-quarter projections indicate further growth. Analysts expect S&P 500 earnings to rise by 10.7% in Q4, driven by a 14.6% growth in the technology sector.
Despite ongoing inflation and interest rate concerns, corporate earnings stability has helped the S&P 500 remain near its historical high, just 2% below peak levels.
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Seasonal Trends Point to Optimistic Year-End Performance
Analysts expect seasonal trends to support U.S. equities through year-end. Goldman Sachs highlights that the fourth quarter typically outperforms in election years. The firm reported that the S&P 500 has historically delivered a median fourth-quarter return of 6.25% in election years, compared to 5.2% in non-election years.
Mutual funds and pensions wrapping up fiscal years at the end of October contribute to this trend, often resulting in fund managers rebalancing portfolios and repurchasing stocks.
Institutional and Retail Activity Bolsters Market Support
The end of the election cycle also provides a “clearing event,” reducing uncertainty around risk assets. Additionally, the fourth quarter sees tax-loss harvesting and increased retail and institutional investment. These factors often drive additional liquidity and demand, creating a favorable market environment.
Current Market Performance and Notable Movements
As of 9:33 a.m. EST on Election Day, the Dow Jones Industrial Average rose by 0.21%, while the S&P 500 Index gained 0.42%. Key gainers include Palantir Technologies Inc., which surged by 15.77%, Emerson Electric Co., up 6.90%, and Cummins Inc., increasing by 4.30%.
On the downside, Celanese Corp. fell 19.96%, making it the day’s weakest performer. Other declines included Archer Daniels Midland Co., down 9.49%, and NXP Semiconductors N.V., which dropped 7.41%.
Global Markets Show Mixed Reactions
Global markets also showed varied results, with the Shanghai Composite Index climbing 2.32%, while the STOXX Europe 600 Index saw a modest 0.20% drop. In Asia, the Nikkei 225 rose by 1.11%, and the Hang Seng Index gained 2.14%. Europe’s STOXX 600 and the FTSE 100 Index faced slight declines of 0.20% and 0.25%, respectively.
Investor Takeaways: Focus on Long-Term Growth Amid Election Cycles
As Election Day unfolds, the stock market’s immediate response may reflect a minor “election rally,” but seasoned investors know that long-term performance depends more on broader economic indicators. With strong fourth-quarter earnings projections and supportive seasonal factors, U.S. stocks may sustain their gains well into the new year, as markets continue to navigate inflation, interest rate policies, and the global economic landscape.
