Webinar

Fall 2024 Post-Election Webinar

Gauging the market impact of election results.

Key takeaways

  • With the 2024 election season upon us, voter preferences are likely to be influenced in part by the state of the economy and markets.

  • The S&P 500 is up roughly 48% since Biden took office in early 2021.

  • The U.S. economy has proved surprisingly resilient in the face of efforts by the Federal Reserve to slow growth to lower inflation.

Whether it is fair or not, investors often look at the state of the economy as the measure of a President’s effectiveness. It is a factor that potentially relates directly to their own lives that governing policies may impact. In 2024, the electorate appears to be looking not just at the U.S. economic growth rate, but other factors as well, such as rising living costs and the strength of the labor market.

President Biden announced in July 2024 that he would not seek re-election, and his vice president, Kamala Harris, became the Democratic party nominee, running against Republican former President Donald Trump. This may alter the focus on the administration’s economic record as the 2024 election campaign nears election day.

President Biden’s term began with the economy in the early stages of recovery from the COVID-19 pandemic. The economy was in the midst of a strong recovery in 2021 when inflation began to emerge as an issue. This caused the Federal Reserve (Fed) to alter its near-zero interest rate policy, raising the federal funds target rate it controls by more than 5% between March 2022 and July 2023. That change was intended to slow economic growth to lower inflation. Economic growth moderated from early 2022 on but the economic expansion continues.1

Chart depicts the U.S. economy's growth and contraction Q1 2021 - Q2 2024.
Source: U.S. Bureau of Economic Analysis, “Real Gross Domestic Product and Related Measures: Percent Change from Preceding Period,” August 29, 2024.

Inflation became a significant issue during the Biden administration, peaking at 9.1% in June 2022 before beginning a decline to around 3.0% by mid-2023. However, only in July 2024 did inflation, as measured by the Consumer Price Index, drop below 3%.2 Also during this time, the U.S. labor market remained strong, wage growth began to exceed the inflation rate, and consumers maintained consistently solid spending, which proved to be the most important factor driving economic expansion.

In addition, government spending was a positive contributor to economic growth. “Spending programs that passed in the first two years of the Biden administration influenced the rate of economic growth,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. These included an infrastructure investment package and the Inflation Reduction Act, which provided incentives for green energy projects. Those dollars started to have more impact in 2023, and may again in 2024, according to Haworth.

The stock market during Biden’s tenure trended higher, but with significant volatility. The benchmark S&P 500 generated impressive returns of 28.7% in 2021 and 26.29% in 2023. Sandwiched in between was a bear market, as the S&P 500, at its low point, dropped 25% in 2022. 2023’s stock market recovery was narrower in nature, driven primarily by a small group of S&P 500 sectors dominated by technology-oriented stocks. In 2024, the S&P 500 repeatedly reached new all-time highs, mixed with short periods of market volatility. Year-to-date through August 28, 2024, the S&P 500 gained 18.31%.3

S&P 500 performance during Biden's presidency through August 23, 2024.
Source: U.S. Bank Asset Management Group as of August 23, 2024.

Since Biden took office, the S&P 500 is up 48%, with less than five months left in the President’s current term.3 That ranks as a positive outcome, but slightly lags returns generated in each of the three previous four-year Presidential terms.

Chart depicts S&P 500 returns during presidential terms since 1981 (as of August 23, 2024).
Source: U.S. Bank Asset Management Group. Based on S&P 500 prices for four-year period from inauguration day (Jan. 20) of a Presidential term’s first year to Jan. 19 at the end of the term (four years later). For current term (Biden 2021), return through August 23, 2024.

The markets strong rally since late 2022 along with rising home values has created what Haworth says is a “wealth effect” for consumers. “This gives them more room to spend nominally,” says Haworth. “However, recent surveys showed a decline in consumer confidence, which might be related to inflation’s persistence.”

 

Bond market face more challenges

The bond market looks significantly different in the fourth year of President Biden’s term, compared to when he took office. This primarily occurred because the Fed, in a 16-month period, significantly hiked the short-term federal funds rate it controls. In response, yields on the benchmark 10-year U.S. Treasury note, which were below 1% at the outset of 2021, rose as high as 4.98% in October 2023. In 2024, 10-year Treasury rates stood above 4% for most of the year, but in August dropped below that threshold.4 While bonds generated negative total returns in 2022, returns were modestly positive in 2023. After spending much of 2024 in negative territory, the broad Bloomberg Aggregate Bond Index rallied in August, with a year-to-date 3.47% total return.5 Bond prices rise as bond yields decline.

Chart depicts yield on the 10-year Treasury note January 2021 - August 23, 2024.
Source: U.S. Department of the Treasury, Daily Treasury Part Yield Curve Rates as of August 23, 2024.

“Investors have poured money into cash vehicles offering 5% yields, but they need to be cautious,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Once the Fed decides to begin cutting interest rates, yields on short-term vehicles will decline.”

“Investors have poured money into cash vehicles offering 5% yields, but they need to be cautious,” says Haworth. “Once the Fed decides to begin cutting interest rates, yields on short-term vehicles will decline.” Haworth recommends income-oriented investors begin to lock in current high rates on longer-term bonds.

 

Interest rates and the economy drive markets

Although the political and policymaking environment draws headlines, particularly in an election year they have not been major capital market drivers. Investors appear more focused on Fed policy, economic data and corporate earnings.

“We had much better economic growth than many expected in 2023, and it remains on track in 2024, as to this point, fueled by a strong labor market,” says Haworth. Capital markets appear to be increasingly focused on pending Fed interest rate cuts, with the expectation that this may boost capital markets.

 

A changing legislative landscape

President Biden, backed by a Democratic-controlled Congress, successfully passed a number of legislative initiatives in his first two years in office. The midterm elections in 2022 changed the legislative landscape. While Democrats maintained narrow control of the Senate, Republicans won a slim majority in the House. “With power split between two parties, legislative initiatives have been limited,” says Kevin McMillan, head of state and federal government relations at U.S. Bank. However, bi-partisan support in April 2024 led to approval of a funding package to, among other things, support Ukraine's military defense against Russia and to aid Israel as well in its conflict with Hamas. However, it took months to gain final passage of these and related measures.

The political power divide led to contentious negotiations that resulted in last minute approval of an agreement to allow the government to issue additional debt, and to an overdue approval of the 2024 fiscal-year budget. However, the two parties did manage to reach agreement in both instances. However, fiscal year 2024 ends on September 30, and Congress has yet to pass a budget for the next fiscal year that begins in October. Action will need to occur by that date to avoid a partial government shutdown.

Haworth is skeptical that continued partisan differences in Washington will have a major impact on markets. “The market is currently at a wait-and-see point about the 2024 election, seeking more clarity about the candidates, possible election outcomes and the potential economic and market ramifications,” says Haworth. “Yet that election uncertainty may become a growing capital market concern.”

 

Positioning portfolios today

It’s important to note that several factors contribute to market performance, and it’s not strictly a reflection of the individuals who wield power in Washington or the outcome of any given election. Investors are best served by maintaining a broader perspective.

Depending on one’s goals and time horizon, today’s investor might consider:

  • A modest overweight position in equities, while reducing fixed income positions, to take advantage of ongoing economic growth and the impact of higher inflation.
  • Equity investors may benefit from putting money to work in an equal-weight S&P 500 Index fund that allocates equally across the index, rather than concentrating a significant portion on the largest stocks represented in the index, which have already experienced significant gains.
  • Within fixed income portfolios, tax-aware investors may wish to consider a modest allocation to high-yield municipal bonds and longer duration bonds.
  • For non-taxable fixed income portfolios, consider ways to enhance income with positions in non-agency residential mortgage-backed securities and manage portfolio duration using long-maturity U.S. Treasury securities.

Regardless of how events play out during the 2024 election cycle, a sound investment strategy is to focus on a properly diversified portfolio that is attuned to your goals, time horizon and risk appetite.

Have questions about the economy, capital markets or your finances? Your U.S. Bank Wealth Management team is here to help.

Frequently asked questions

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Disclosures

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  1. Source: U.S. Bureau of Economic Analysis.

  2. Source: U.S. Bureau of Labor Statistics.

  3. Source: S&P Dow Jones Indices LLC.

  4. Source: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates.

  5. WSJ.com, “Tracking Bond Benchmarks,” August 28, 2024.

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Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Stocks of mid-capitalization companies can be expected to be slightly less volatile than those of small-capitalization companies, but still involve substantial risk and may be subject to more abrupt or erratic movements than large-capitalization companies.

Stocks of small-capitalization companies involve substantial risk. These stocks historically have experienced greater price volatility than stocks of larger companies and may be expected to do so in the future.

The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes.