Our Top Market Takeaways for January 19, 2024.

As if it wasn’t busy enough, 2024 is the year of elections.

Over 40% of the world’s population and economy will hit the polls to elect national leaders, starting with Taiwan last weekend and culminating with the United States in November. This past week’s Iowa caucus already kicked off U.S. primary season, and New Hampshire follows next week. Election debate will only ramp up from here.

Right now, it’s looking like another Biden versus Trump standoff – at least according to prediction markets, favorability polls and most political pundits. That said, 10 months is a long time in politics. Much could change, and the lead-up to Election Day can stir up emotions and apprehension about the future.

Today, we debunk three common election myths when it comes to markets.

Myth 1: Stocks don’t do well in election years

Reality: Returns in election and non-election years usually aren’t all that different.

We took a look at how the S&P 500 has fared in both instances. Going back to 1928 (for as long as we have data), stocks returned 7.5% on average during election years, compared with 8% during non-election years. Slightly weaker but still solid.

That said, election years do tend to be more volatile than most, especially in the lead-up to voting day. For instance, the average election year since 1980 has seen an intra-year drawdown of about 17% versus 13% in non-election years. Volatility is a feature, not a bug, of investing in any year, but it tends to be more pronounced as households grapple with more uncertainty.

Yet as that uncertainty dissipates as results are announced, stocks tend to rally on a sense of clarity about the path forward.

Myth 2: Markets will crash if so and so candidate wins

Reality: We’ve seen booms and busts on both sides of the aisle. The economic backdrop tends to matter more.

While stocks tend to rally in elections’ aftermaths, it’s true that some election years have seen bigger swings than others. But those instances have tended to do more with the underlying macroeconomic backdrop than the election itself.

For instance, in the last presidential election in 2020, it was the tides of lockdown and reopening from the COVID-19 pandemic that impacted broad markets most, rather than the differing ideologies between now-President Biden and then-President Trump. Or consider 2008 when Democrat Barack Obama ran against Republican John McCain: The unfolding Global Financial Crisis was the predominant driver, rather than opposing candidate views on the war in Iraq and health care policy.

With that, and the last 40 years of elections in hand, stocks have still been higher a year later on average.

Myth 3: The Federal Reserve doesn’t change policy in election years

Reality: The Fed hasn’t shied away from hiking or cutting rates during election years.

Going back to the 1950s, 2012 has been the only election year that the Fed did not either raise or lower interest rates. Similar to myth #2, this suggests that the economy, rather than politics, is in the driver’s seat when it comes to monetary policy. We believe that this year will be no different.

The Fed’s big focus today is how to softly land the economy, and it’s no small task. The pivot toward rate cuts requires careful navigation, ensuring inflation makes the last mile of progress and that growth doesn’t tip into recession.

That said, once the election results are in, the new administration’s policy proposals could shift expectations for growth, inflation and even earnings. Some could also impact individual sectors that are most closely linked. But at this point in the race, it’s still too early to outline those potential impacts, and it’s also important to note that not all policy proposals go through. High-impact proposals seem more likely to be adopted only if one party controls the White House and Congress, and even then, policymakers are often confronted with challenges and bottlenecks.

As the election chatter builds, we expect some of the hot button issues to include government spending and the deficit, tax policy, regulation, trade and geopolitics.

How can you plan for the year ahead?

While politics can evoke strong emotions, we don’t think one should lose sight of their long-term investment goals. We believe the economy will remain the predominant driver of policy decisions and markets broadly.

Of course, there are risks, from ongoing friction points such as inflation to wildcards such as geopolitics. But we believe that as growth holds up, price pressures abate, and the Fed embarks on an easing path, there is ample opportunity for multi-asset investors in the year ahead.

Your J.P. Morgan team is here to help you navigate the shifting landscape and create a portfolio that is built to last, whether it be through business cycles or elections.

All market and economic data as of 01/19/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

Index definitions:

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases. 

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

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• As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.
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