Democrats or Republicans: which party is better for your investments?

Should you adjust your investments now that the US elections are just around the corner? Probably not. If we look at past stock market performance, sitting tight is often the best strategy. Although the stock markets may become a little volatile in the run-up to 5 November, on the whole the long-term impact of election results seems rather negligible, regardless of which candidate wins.

1. Are election years better or worse for the stock markets?

Investors seem to have little concern about the possible consequences of the US elections this year. The S&P 500 hit 43 all-time highs in the first three quarters of the year. Of course, these records are not a direct result of the election campaigns. Instead, the general sentiment suggests that investors have not lost any sleep over politics, despite two assassination attempts on one of the candidates, an incumbent president not running for a second term and fluctuating election polls failing show a clear winner.

It is not unusual for an election year to have little impact on the stock markets. Election years tend to benefit US shares, or, more precisely, elections don't tend to put a spanner in the works. In the 23 presidential election years since 1932, the S&P 500 ended the year in the green in 74% of cases, with an overall average return of 6.2% compared to an overall average return of 8.7% in all years since 1932 (excluding dividends*). However, averages don't tell the whole story, as some election years have coincided with crashes that had little to do with US politics. Two examples are the dotcom bubble when it burst in 2000 and the financial crisis of 2008. If you disregard these two years, you end up with an average S&P 500 return of 9.1% in election years.

*Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Data on 30 september 2024.

Conclusion?

Historically, on average the US stock market did slightly less well during an election year. However, this difference is not significant enough to make you want to stay away from the stock markets. Quite the opposite, in fact.

2. Are Democrats or Republicans better for the stock markets?

The American electoral system is very different from what people are used to in Belgium. In Belgium the government tends to be a coalition of various parties, but in the US the winning party takes it all. And presidents often have to work with a divided Congress. The Democratic Party candidate may soon be the winner, but that may not stop the Republicans taking control of the Senate and/or the House of Representatives. This is because representatives in the House of Representatives are elected for a two-year term, while representatives in the Senate are elected for a six-year term. Every two years, the members of the House of Representatives and one third of Senators are elected or re-elected.

Average S&P 500 returns (annualised) 1950-2023

Source: Darrow Wealth Management, YCharts. Calculation, May 2024.

If we take a look at the S&P 500's performance between 1950 and 2023, it is quite remarkable to say the least. Under a Democratic president and a Republican Congress, the index achieved an annualised return of 14.55%, far better than under a Democratic president and a Democratic Congress (8.72%). The S&P 500 also performed well when a Republican president faced some headwind: in case of a divided Congress, results (12.2%) were slightly better than when the Republicans were able to win the presidency as well as Congress. The combination of a Republican president and a Democratic Congress turned out to be the worst cocktail (1.04%). However, saying that Democrats are better for the stock markets would be jumping to conclusions. The above returns do not tell investors much about why the markets did well or badly, nor how they will likely perform in the future. Many events that impact the economy and markets are beyond the control of whoever is in power anyway. Monetary policy, fiscal policy, economic growth, the labour market, corporate earnings, etc. are far better indicators of future returns. The economic context is therefore much more relevant than the political context to understand the historical market environment and returns.

Conclusion?

Historically, on average the US stock market performed slightly better under a Democratic president. However, the difference is not huge and is heavily influenced by the broader economic context. Investors who make decisions solely on the basis of party policy run the risk of overlooking key macroeconomic factors.

3. Which sectors could benefit from a Democratic or Republican victory in 2024?

Each party has its own policies that may put certain sectors at an advantage or disadvantage. When the Democrats come to power, sectors such as clean energy, healthcare and infrastructure projects are expected to do well. This stems from their support for initiatives for more sustainability and a stronger social safety net. Elsewhere, the pharmaceutical industry often faces stricter regulations and potential drug price controls under a Democratic government. This may put pressure on the profit margins of major pharmaceutical companies, but the broader healthcare sector – such as companies that provide home care and medical technology – could benefit from the expansion of health programs such as Medicare.

Conversely, the Republicans tend to boost sectors such as oil and gas, defence and financial services. Republicans are traditionally known for their pro-business policies, which often involve tax cuts and less regulation. This may benefit traditional energy companies, as Republicans often advocate for fewer environmental rules and place more emphasis on energy independence. The defence sector may also react positively to a Republican victory, as Republican presidents tend to increase spending on defence. The financial sector could also flourish under a Republican government, which is often in favour of deregulation and less stringent controls on the financial markets.

Investors often consider adjusting their portfolios to potential rallies in certain sectors. However, it is quite difficult to build a reliable strategy based on different political outcomes. One party's victory does not guarantee that that particular party will deliver on all its campaign promises. Increasing political polarisation makes it even more difficult to reach agreements within one party. In 2020, Joe Biden campaigned to reduce fossil fuels and promote renewable energy sources. On the other side, Donald Trump spoke out in support of the traditional energy industry during his presidency. Despite this, the performance of both sectors went the opposite way. Under Trump, the S&P 500 Energy index fell by 40%, while under Biden it rose by around 125%. Under Trump, the S&P 500 Global Clean Energy index rose by 275%, while it fell by 50% under Biden**. Ultimately, the markets were mainly driven by macroeconomic forces rather than political policy.

**Source: Standard & Poor’s. Data on 10 october 2024.

Conclusion?

It is tempting to think that a political party has a strong influence on certain sectors. However, broader economic factors tend to matter far more than purely political decisions. A well-diversified portfolio aligned with economic cycles will generally outperform a strategy that only depends on the outcome of the elections. Nevertheless, adventurous investors can still take advantage of the expected policy differences between the parties in the short term.

Uncertain about the impact of the US elections?

Consider periodic investment. This allows you to spread your investments across different sectors over time.