As we race toward the US presidential election in November and contemplate the prospects of either Biden remaining in the White House or a Trump comeback, it’s not surprising that investors are speculating about the implications for financial markets.
But politics are just one of the many forces that move markets, according to a new report from Morningstar Indexes. In the recent commentary, Morningstar Indexes Strategist Dan Lefkovitz puts politics and markets into perspective, examining US equity and bond market performance under the past four US presidential administrations.
Dan Lefkovitz – Strategist, Morningstar Indexes
“While elections can impact markets, they don’t take place in a vacuum. Markets have thrived (and sometimes crashed) for many reasons under presidential administrations of all stripes. Political forecasting is tricky business, and predicting the market reaction to elections ratchets up the degree of difficulty for investors.”
Politics & Markets: Morningstar Index Performance during US Presidential Administrations
Key takeaways from the new report:
- Context is Critical. When comparing US equity and bond market performance under the past four presidential administrations, we see that stocks did best under Trump and performed worst under Bush. Equity returns under Obama were very strong, while stocks have posted solid gains under Biden. It is important to look at politics within the broader market context.
- Post-Election Reactions can Fade. Small-cap value stocks rallied after Trump’s election in 2016 and Biden’s election in 2020, only to see large-cap growth regain the dominant position over the US equity market. Surprising, given their policies, technology was the best-performing equity sector under Trump, while the energy sector has led under Biden.
- Candidates are Familiar but Circumstances have Changed. Yes, we may think we have seen this movie before, with two very familiar figures heading up the Democratic and Republican parties vying to win – or win back – the US presidency. But we shouldn't assume that market behavior in 2024 will resemble that of 2016 or 2020. The candidates might be the same, but the context differs. Plus, markets know that campaign rhetoric is one thing, but what actually happens under an administration is quite another.
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