The Undercurrents of Political Uncertainty
The 2024 presidential election is well underway, with the recent Iowa caucuses and the New Hampshire primary setting the stage. It’s a common misconception that the impact of elections on markets only becomes apparent close to the actual election date in November. In reality, the influence of elections on the market landscape can manifest much earlier, permeating through various sectors and asset classes.
Vying Futures
The fortunes of sectors and asset classes are subject to the ebb and flow of election outcomes. Uncertainty tends to cast a shadow over markets, and the prospect of different policies taking hold under different political regimes can cause market sentiments to teeter. Piper Sandler’s portfolio allocations reveal the significant variations in perspectives under different 2024 election outcomes. The shifts span from Long positions under one candidate (green boxes) to Short positions under others (red boxes), underlining the stark contrast in market leanings.
The election year’s inherent uncertainty renders the pricing of different asset classes and sectors a daunting task for the market, akin to navigating through a labyrinthine maze of shifting tides and invisible currents.
Mapping the Volatile Terrain
Election years are synonymous with lower returns and amplified volatility. Historical data from PFG reveals that average equity returns during election years, be it presidential or midterms, lurk at about half the levels witnessed in non-election years—a stark reminder of the tumultuous nature of election-induced market dynamics.
Equity markets’ meandering path during election years, as evidenced by Capital Group’s research, is reminiscent of a winding river, moving sideways during primary season and only gaining traction in the summer, as the final candidates emerge from the electoral crucible.
Elections engender heightened volatility, orchestrated by the discordant notes of uncertainty. Before and after the election, equity volatility, measured by the VIX, embarks on a rollercoaster ride, surging by 25% in the months leading up to the election, only to plummet by nearly 20% in the subsequent month.
Post-Election Fiscal Horizons
Once the electoral dust settles, the post-election market landscape unfolds with nuanced dynamics. On average, the market witnesses a 3.3% gain over the next three months post-election, etching out a faint silhouette of the market’s response.
However, the transition from Republican to Democrat or vice versa, or winning a re-election, doesn’t consistently foreshadow a clear advantage. There are select instances, correlating with macroeconomic patterns, where the market paints a different picture, as observed with Presidents Reagan, G.W. Bush, and Obama.
History shows that during their initial elections, the economy loitered within or around recession, coinciding with a dip in stock returns. Conversely, during their re-elections, the economy was in full swing, which corresponded to the upturn in returns. The correlation with macroeconomic factors is palpable—a testament to the profound impact of the macro landscape on post-election market dynamics.
Macro Factors: A Pivot of Influence on IPOs
The contours of the IPO landscape mirror the capricious dance of macroeconomic upheavals. IPO activity, unperturbed by party affiliations, resonates with the macroeconomic symphony.
The 2001 recession and the Credit Crisis recession witnessed a decline in IPOs, coinciding with the transitions from Presidents Clinton to G.W. Bush and from G.W. Bush to Obama. Similarly, once the Fed made a pivot to rate hikes in Q1 2022 under President Biden, IPOs faltered. The sway of macroeconomic tides on IPO activity is striking, eclipsing the purported influence of elections.
A new barometer for IPO activity, the Nasdaq IPO Pulse Index, assumes center stage, offering a fresher perspective. The influx of new data will likely shed light on the disparate influences shaping the IPO climate, steering us through the treacherous waters of IPO activity.
If history is any indication, we are poised for a turbulent journey marked by heightened volatility and potential reduced returns. While the looming specter of elections casts its shadow, the macroeconomic tempest is equally instrumental. The markets and IPOs may find solace in the anticipated soft landing and Fed rate cuts coming to the rescue this year.
The symphony of market dynamics, entwined with the capricious dance of elections and the silent musing of macroeconomic tremors, permeates the market landscape, crafting an enigmatic narrative that promises to unfold in the coming months.
The information provided above serves an enlightening and educational purpose. It is imperative to note that nothing herein should be misconstrued as investment advice, be it pertaining to a specific security or an overarching investment strategy. Nasdaq, Inc. and its affiliates refrain from making any recommendations concerning the buying or selling of securities, or portraying any representation regarding the financial standing of any company. Any statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes do not guarantee future performance. Actual outcomes may substantially vary from the expressed or implied conjectures. Past performance does not indicate future results. It is paramount for investors to conduct their due diligence and meticulously assess companies before making any investment decisions. It is strongly encouraged to seek advice from a securities professional. © 2024. Nasdaq, Inc. All Rights Reserved.
