Market Performance in U.S. Presidential Election Years: A Historical Perspective

The S&P 500 index has historically exhibited varied performance during U.S. presidential election years, influenced by the elected party. From 1928 to 2020, the index averaged an approximate 7% return in election years. When a Democrat was elected, the average return was approximately 8.29%, while a Republican election corresponded with an average return of about 15%. These figures suggest a slight historical advantage during Republican election years, though numerous factors beyond the election itself can impact market performance. As of writing this, the S&P 500 index is currently up over 25% YTD.

Historically, the average annual returns of the S&P 500 have averaged an annual return of approximately 10.8% under democratic presidents, and 5.6% under republican presidents.

Also to note, the stock market reacts positively to reduced uncertainty. With the recent conclusion of the U.S. presidential election and clearer indications from the Federal Reserve regarding interest rate policies, investor confidence has strengthened. This clarity diminishes market volatility and fosters a more favorable environment for equities in the short term. For instance, following the 2024 election (which is still being counted), major indices like the S&P 500 and Dow Jones Industrial Average reached record highs, reflecting this sentiment.

As of November 2024, corporate profits have shown resilience, with the majority of companies reporting earnings that surpass expectations, contributing to the stock market's upward trajectory. The U.S. economy continues to expand, with real GDP growth projected at 2.6% for 2024. The unemployment rate remains low, edging up from 3.7% in early 2024 to 4.0% by the first quarter of 2025, indicating a robust labor market.

Wage growth has been steady, supporting consumer spending and overall economic health. Inflation has moderated, with the Personal Consumption Expenditures (PCE) price index expected to reach about 2.25% by the end of 2025, aligning closely with the Federal Reserve's target. The Producer Price Index (PPI) has also stabilized, reflecting balanced input costs for producers.

Although we will release our full outlook next year, looking ahead to 2025, at this time the U.S. economy is anticipated to maintain moderate growth. The Conference Board forecasts a 1.7% increase in real GDP for the year. The labor market is expected to remain healthy, with the unemployment rate stabilizing around 4.0%. Inflation is projected to stay near the Federal Reserve's 2% target, providing a stable economic environment conducive to sustained growth.

However, it is important to note that the rise in the 10-year despite the Fed lowering rates gives pause to the fixed income markets and may be telling of what’s to come. Investors may be anticipating higher future inflation and interest rates, which increases long-term yields.

While the current economic indicators are positive, investors should remain vigilant. Market corrections—defined as a decline of 10% or more in stock prices—can occur unexpectedly, triggered by specific events or shifts in investor sentiment. Given the market's recent highs, a correction within the next quarter or two is highly possible. Maintaining a diversified portfolio in 2025 and a long-term investment strategy can help navigate potential market volatility.

Note: Interlaken Advisors does not offer investment or portfolio management services.

Nothing herein is intended to be investment advice. All investments involve the risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.

Mid-2024 Market Update: Global Stocks on Track

As we move beyond the middle of 2024, global stock markets have shown impressive performance, aligning with our expectations. The S&P 500 gained another 4.4% and the MSCI World Index recorded a 2.6% gain for the second quarter, bringing the first half of the year to an overall increase of 16.15% and 11.7%, respectively. Sectors like Technology, Utilities, and Consumer Defensives have done the best, with the largest market cap weighted stocks leading their industries (200bln and more). In our view, this serves as a great start toward what's anticipated to be an important election year.

Although the first half of 2024 has seen mostly stability and significant returns, many anticipate that this calm period might precede increased market volatility. Historical patterns suggest that short-term market corrections (between 10% and 20%) are always a possibility, driven by sentiment or other factors. However, volatility is an intrinsic part of the market landscape, and trying to predict its exact timing is often unwise. Instead, we interpret current market conditions as a signal to stay composed, with a broader market uptrend likely to continue throughout the year.

While some headlines suggest the market is reaching a peak, we would like to offer a different perspective. "Average returns" are rare, and during bull markets, stock prices often hit extremes. Historically, election years with strong first-half returns have typically yielded positive second-half results—specifically, 15 out of 16 election years saw second-half gains.

It is important to remember that we don't align ourselves with any political figure or party, focusing instead on how political developments might impact market trends. Recent polling has seen sharp swings, with President Biden’s late-June debate performance and the shocking assassination attempt on former President Trump driving volatility. Additionally, potential Electoral College outcomes have caused some shifts in sentiment, with Trump's chances seeming to improve just before Biden’s announcement that he will step aside in favor of Vice President Kamala Harris. As of now, it's difficult to predict how this situation will evolve, though it's clear that opinions on Trump remain highly polarized.

Despite these uncertainties, market sentiment typically stabilizes once election outcomes become clearer. Investors often respond more positively as uncertainty fades, and election results—regardless of the winner—tend to create a more defined outlook for markets.

Another common concern we often hear is about the rising national debt. While it's true that the U.S. debt is high, the cost of servicing this debt remains quite manageable when viewed as a percentage of the overall GDP. Historically, we've seen much higher debt-servicing costs, and the country was able to navigate those periods successfully. Given this context, we don't foresee the national debt posing any significant issues now or in the near future. The current economic structure supports these debt levels without causing major disruptions.

Meanwhile, economic fundamentals continue to move forward. Inflation appears to be slowing more rapidly in Europe than in the U.S., but wage increases are helping restore consumer spending power globally. After years of conservative cost management, many corporations are shifting to a growth-focused strategy, supported by strong balance sheets, increased earnings, high profit margins, and low default rates. We anticipate that, with these factors in place, Corporate America will be well-positioned for future investment.

Note: Interlaken Advisors does not offer investment or portfolio management services.

Nothing herein is intended to be investment advice. All investments involve the risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.

The Impact of Fed Rate Hikes on US Stock Market Returns

In the relationship between monetary policy and financial markets, few moves are as closely watched as Federal Reserve rate hikes. These decisions have profound effects on various sectors of the economy and as the Fed adjusts interest rates, the ripple effects on stock market returns are both complex and significant.

When the Federal Reserve raises interest rates, it typically does so to curb inflation or cool down an overheating economy. Higher interest rates mean increased borrowing costs for businesses and consumers alike, which can lead to reduced spending and investment. At the prospect of slower economic growth due to higher interest rates, investors typically believe stock prices will decline. However, history shows this is not always the case - as demonstrated by the current bull market.

Additionally, policy changes often impact specific sectors differently. Hikes can cause interest-rate-sensitive sectors such as real estate, utilities, and consumer staples to underperform, as higher borrowing costs erode profitability. Conversely, sectors like financials may benefit from higher interest rates, as they can potentially earn more on loans and other interest-sensitive assets.

Wall Street currently expects the Fed to begin cutting rates at some point this year (although the timing of which remains unpredictable). The historical averages of the past 50 years of fed cutting cycles shows when policy loosens, bonds have had the highest returns of all asset classes:

Policy Rate (bps) : -491

10-year Treasury (bps) : -226

S&P 500 Return : 10%

U.S. Core bonds Return : 24%

U.S. Cash Return : 10%

In recent years, the Federal Reserve has adopted a more cautious approach to both rate hikes and cuts, emphasizing data dependency and a willingness to adjust policy in response to evolving economic conditions. This approach aims to balance the objectives of maintaining price stability and fostering sustainable economic growth while minimizing disruptions to financial markets.

In conclusion, Fed rate hikes and cuts have a multifaceted impact on US stock market returns, influencing investor sentiment, sector performance, and overall market dynamics. While initial reactions may be negative or positive, the long-term effects of both hikes and cuts have only led to opportunities in hindsight.

Note: Interlaken Advisors does not offer investment or portfolio management services.

Nothing herein is intended to be investment advice. All investments involve the risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.