How could the US election affect global stock markets, and what might this mean for your investments?

The US election is arguably one of the most eagerly anticipated political events of this year, particularly after current president Joe Biden withdrew from the campaign last month. Vice-president Kamala Harris has been selected as the Democratic Party nominee. If elected, she would be the first female US president in history.

As an investor, you may be wondering how the election could affect stock markets and, in turn, your own investment portfolio.

Though it’s impossible to know for certain how things will play out, here are some of the points you need to know about. Find out what the potential implications could be for your portfolio and how you can navigate this to continue to work towards your long-term goals.

There’s no telling exactly how markets will perform after the US election

If you hold US-based stocks as part of a diversified portfolio, it’s possible that your wealth may be affected by changes to the US stock market. Yet stock market performance can be influenced by many different factors, so it’s nearly impossible to say with certainty how this year’s election might affect your investments.

That said, historical data from previous elections can offer some indication. Morgan Stanley analysed the S&P 500 performance in election years between 1928 and 2016, finding that in 19 of the 23 years in which an election took place, returns were positive. The average return in an election year was 11.28%; if a Democrat was elected, the average return was 7.6%, while for a Republican it was 15.3%.

Despite these findings, The Conversation points out that there is evidence of higher stock market returns when Democratic nominees have been elected. This suggests that it is very difficult to identify patterns related to US elections, potentially because of how infrequently they occur. Moreover, a range of other factors, such as economic performance, can affect stock markets during election campaigns.

As such, you may wish to take any predictions about what might happen to the value of your portfolio during and after the election with a pinch of salt. Additionally, think carefully before amending your investment behaviours based on conjecture alone.

Recent events have increased uncertainty for the US stock market

In July, a number of unexpected events in the campaign process have increased the level of uncertainty surrounding the election. On 13 July, Donald Trump was struck by a bullet in an assassination attempt. Just one week later, Joe Biden withdrew his re-election bid and announced his support for vice-president Kamala Harris to take his place as the Democratic Party nominee.

These events have increased uncertainty for US markets, but it’s difficult to say exactly how this might affect market returns.

US News reports that markets seemed largely unaffected in the immediate aftermath of Biden’s withdrawal from the campaign. Since then, however, the BBC has reported that recession fears caused stock markets to fall sharply at the start of August.

The economy and monetary policy could also affect stock market returns during and after the election

Throughout this US election campaign, the Federal Reserve (Fed) has continued to fight inflation with interest rate hikes. The Guardian reports that, as of August 2024, the central bank’s benchmark interest rate is between 5.25% and 5.50%. According to an article from CNN, Fed chair Jerome Powell has hinted that the rate could fall in the coming months, though inflation remains elevated from the Fed’s target.

The report also shared that economic growth has been strong in the US over recent months.

Both of these factors can affect stock market performance. With so much change expected in the second half of 2024, it will be tricky to discern whether changes to performance have been caused by the election, changes to monetary policy, or economic factors.

It’s usually sensible to take a long-term view of your investments

There are two important points to remember when considering the US election and its potential impact on stock market returns.

1. Infrequent events like this one are unlikely to have a permanent impact on returns
2. Past performance does not guarantee future performance, so it is simply impossible to know for sure how your investments will react.

Rather than focusing on how a specific political event like this one could affect your portfolio, it’s usually more sensible to take a long-term view of your investments. A carefully balanced portfolio can usually weather any short-term volatility that markets may experience. So, it may be wise to avoid making rash decisions about your investments driven by fear or nerves.

Get in touch

I can help you to create a financial plan that helps you to grow your wealth and achieve your long-term goals. Email marnel.stafford@fosterdenovo.com or call 07305 970959 or 0207 469 2800 to find out more about how I can help you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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