Is Your Portfolio Primed for the 2024 Elections?

The stock market reacts to many external factors, with politics being a major one. Presidential elections, in particular, can have a wide-reaching impact on the market and, in turn, your investment portfolio. Historically, the S&P 500 has averaged a 7% gain during U.S. presidential election years since 1952. There have been 18 presidential elections in the country so far. As the nation prepares for yet another election cycle, it is crucial to understand how your investments might be affected by the event.

A financial advisor can help you understand the impact of politics on the economy during the election year. They can also help you plan ahead and prepare for the upcoming presidential elections. This article will also guide you through the potential implications of the 2024 elections on your portfolio and how to navigate the uncertainties ahead by investing in the right options.

Is your portfolio positioned correctly for the 2024 elections?

Before you start positioning your investment portfolio for the 2024 elections, you must first understand how elections affect the economy. The year 2024 has been an interesting year for the U.S. politics. The current president has chosen not to seek re-election but has nominated a different candidate. On the other hand, an assassination attempt was made on a major presidential candidate. Even though they seem rare, the events of 2024 can very easily be compared to 1968. Back in 1968, President Lyndon Johnson chose not to run for re-election, and the nation was shaken by the assassination of Robert F. Kennedy. Despite these challenges, the stock market remained steadfast. After President Johnson’s announcement, the S&P 500 rallied by 15% until the end of the year and posted a total return of 11%. If you look at history, this suggests that while political turmoil can create uncertainty, markets have the capacity to perform positively despite the chaos. Investors often worry about how elections might impact their portfolios, but history shows that the stock market can navigate even the most challenging political climates. Of course, past performance is not a guarantee of future outcomes, but it can offer some reassurance and help you plan ahead accordingly.

Moving to recent years, if you look at the S&P 500’s performance during President Biden’s term, you will find the following:

• In his first year, the market rose and posted an impressive gain of 28.6%.
• However, this momentum did not last, as the second year saw a sharp decline of 18.51%.
• Despite this dip, the market rebounded strongly in the third year, with a 25.67% gain.
• Early data from 2024 up to end of August indicates a continued upward trajectory, with an 18.31% increase.

Historically, the third year is often a recovery period. This is when markets bounce back from midterm volatility, and political uncertainties begin to stabilize. It is important to understand that each presidency is different and will present unique challenges and demands. However, the broader trends may stay the same and can be helpful in your decision-making.

As you approach the 2024 elections, it is essential to be prepared for potential volatility in the short term due to the polls. However, a well-diversified portfolio that aligns with your long-term financial goals can help you prepare and ride out any short-term market fluctuations. It is also advised to stay put and opt for a longer investment horizon, which allows markets to bounce back. Additionally, you can also consider working with a financial advisor to ensure your investment strategy can withstand the upcoming political uncertainties.

Below are some stock options you can invest in an election year:

1. High-quality stocks

High-quality stocks are from companies that are well-established in the market. These businesses offer above-average growth potential and can help you enhance your overall returns. Moreover, since they are well-established, the chances of them failing are lower, and hence, they present minimal risk. Some examples of such stocks include companies like Microsoft, Apple, Google (Alphabet), and Adobe, which have shown stable year-over-year earnings growth. These companies tend to perform in the long term due to their strong foundation and consistent earnings. They also have a robust business model, which helps them survive and sometimes even thrive during uncertain times.

If you are wondering about the stock market performance during the presidential election years, you must know that historically, high-quality stocks have outperformed the broader market. On average, these stocks generate a 3.4% performance differential compared to the market as a whole, which makes them a good choice if you are seeking stability. Interestingly, during election years, these stocks have outperformed by 5.3%, which makes them a good fit even during the elections. Political elections can be a very uncertain time. However, high-quality stocks can help overcome this uncertainty thanks to their well-established stature and robust foundation. So, you may consider investing in companies with proven track records. If you already have these stocks in your portfolio, you can increase your allocation to ensure your portfolio stays stable and is not impacted by market volatility. If you are not investing in these stocks yet, now might be a good time to start. This can help you take advantage of their potential and earn better returns in uncertain times.

2. Value stocks

Value stocks are those that trade below their true worth. These stocks typically have lower Price-to-Earnings (P/E) ratios. They also belong to larger, more well-established companies, much like high-quality stocks. While it may seem odd to invest in stocks that are not currently performing well, the concept of value stocks is different. Value investing is based on the belief that these stocks, even though undervalued right now, will eventually rise to their intrinsic value. For example, if a company’s financials remain relatively solid despite a lower stock price, you can still consider investing in it. Here, the belief is that the price will correct over time, and historically, this approach has often paid off. Value stocks have shown to be profitable during election years. In fact, in an average year, value stocks have outperformed the market by 3.4%. However, this performance gap widens significantly to 10.8% during election years.

If you are focused on value investing, the 2024 elections can be a prime opportunity to increase your allocations in this area. Political uncertainty often leads to price variations in the stock markets, and value stocks can help you capitalize on these variations. So, irrespective of whether you already hold value stocks or are considering adding them to your portfolio, this election year could be the perfect time to capitalize on their growth.

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3. Sector-specific stocks

The consensus analyst price target for the S&P 500 is currently set at 6,133. Analysts are optimistic about the market’s performance and expect the index to rise by about 13.6% over the next 12 months from its closing value on July 25. However, not all sectors are expected to perform equally. When breaking it down by sector, analysts see the most potential for price increases in the communication services sector, expecting it to grow by 22.1%. On the other hand, the real estate sector is expected to see the smallest increase in valuation, with only an 8.4% upside.

Different sectors respond uniquely to market highs and lows, and during election years, some sectors tend to outperform others. For example, since 1973, sectors like financial services and energy have historically outperformed others during presidential election years. Conversely, although technology has been the leading sector over the past 50 years in non-election years, it tends to underperform during election cycles. Additionally, the materials sector generally fares even worse than technology during these years. If you have invested in these sectors, it is essential for you to understand these trends and position your portfolio for the election year accordingly. For example, if you are looking for growth opportunities, sectors like financial services and energy may offer more potential right now. On the other hand, it may be wise to approach sectors like technology and materials with caution. It may be advised not to invest in them right now as they may undermine your portfolio’s overall performance. If you have already allocated some of your investment capital to them, you may consider rebalancing your portfolio and reducing exposure to these areas during the election cycle.

4. Small cap stocks

Small-cap stocks are shares of new or lesser-established companies that are still in their growth stages. These companies tend to be more volatile and carry relatively higher risks compared to mid and large-cap companies. However, they also offer better growth potential. As they are still developing their business and expanding their market presence, there is a chance of earning higher returns if these companies perform well. In contrast, mid and large-cap companies offer little growth as they are relatively better established and have less scope to grow further.

Historically, small-cap stocks have outperformed the broader market by 2.4% in a typical year. During election years, this performance gap expands to 5.3%. So, you may consider increasing your portfolio’s exposure to small-cap stocks ahead of the election. However, it is essential to remember that small-cap stocks come with higher risk. Their value can fluctuate, so it is crucial to be prepared for the potential ups and downs. Hence, before investing any money, make sure to consider your risk tolerance and investment goals carefully. While small-cap stocks can offer lucrative opportunities, they are best suited for people who are comfortable with higher risk.

5. High-dividend stocks

High-dividend stocks offer better stability as they pay regular income in the form of dividends. These stocks not only provide regular dividend income but also capital appreciation, which contributes to their appeal as a stable investment option during elections. Historically, high-dividend stocks have demonstrated improved performance during election years. On average, these stocks outperform the broader market by 0.5%. However, this advantage becomes more pronounced during election years, with high-dividend stocks delivering a 3.8% performance edge over the market. The steady income stream provided by dividends can be particularly attractive amid political uncertainty and offer a cushion against market volatility. In contrast, low-dividend stocks often struggle during election years, underperforming the market.

If you are looking to enhance portfolio stability and earn a consistent income, incorporating high-dividend stocks could be a strategic move, primarily when investing in an election year.

Understanding stock performance

While these investment options can help you prepare your portfolio for the election year, it is crucial to understand that stock performance varies throughout the year.

High-quality stocks usually perform well consistently, with a noticeable boost in the second and third quarters. This makes them a reliable choice as the election year progresses. On the other hand, small-cap stocks, value stocks, and high-dividend stocks tend to see the most improvement in the second half of the year. Small-cap stocks are known for their growth potential and often do better later in the year, and value and high-dividend stocks also become more attractive to investors during these months. So, you can focus on them in the later months.

Knowing these patterns can help you adjust your investments and take advantage of these trends. You can time your portfolio according to these performance patterns and make the most out of your investments while managing risks during the election year.

To conclude

As the 2024 elections approach, it is vital to review your portfolio and prepare for the unique challenges and opportunities that lie ahead. Historically, high-quality, small-cap, value, and high-dividend stocks have performed well during these periods. However, there is no certainty that these stocks will deliver returns in the future. Therefore, you must research well and consult a professional before making a decision. It is also important to time your investments wisely to maximize returns. Additionally, you must understand that your portfolio is not just affected by national elections but also by global ones. The upcoming months are going to be rather interesting globally, with elections in countries like India, the U.K., and France. Hiring a financial advisor can be helpful in this environment. It is also important to stay informed and proactive to turn any kind of political instability to your advantage.

Use WiserAdvisor’s free advisor match tool to get matched with seasoned financial advisors who can help navigate stock market implications during the election year and invest in the right options to secure your portfolio. Answer some simple questions about your financial needs and get matched with 2 to 3 advisors who can best fulfill your financial requirements.