Election Guide 2024

As the United States approaches another pivotal presidential election, investors and everyday Americans alike find themselves grappling with a complex economic landscape. With the potential for significant policy shifts on the horizon, it’s crucial to understand the current state of the economy and consider strategies for protecting and growing wealth in these uncertain times.

While the long-term picture is reassuring, it’s true that election years can bring their own unique market dynamics. In the following sections, we’ll explore common investor mistakes during election years, strategies for maintaining confidence in your portfolio, and how to approach your investments with a long-term mindset regardless of short-term political noise.

We examined several databases and found one of the most comprehensive to be the one published by Capital Group. This report analyzes 90 years of data across 23 election cycles.

No one can predict the future and that includes knowing who will win the election and how the markets will react. We are here to educate and inform so let’s take a peek at some lessons from history.

Primary Season Volatility & Post-Primary Rebound

The first five months of an election year often see lower average returns and higher volatility as candidates debate issues and uncertainty looms large. However, this turbulence is typically short-lived.

Once the primaries conclude and each party has selected its candidate, markets have historically tended to recover. Since 1932, stocks have gained an average of 11.3% in the 12 months following the primaries, compared to just 5.7% in similar periods of non-election years.

Sector Performance Varies

While it’s tempting to try to predict which sectors will perform best based on potential policy changes, this strategy is often unreliable. Election rhetoric can put pressure on certain sectors (like healthcare in recent cycles), but these effects are often overblown and can create buying opportunities for long-term investors.

Across elections, no sector has been immune to change. Some sectors, such as technology, have shown resilience, while others, like energy, have seen sharper swings depending on policies.

Tax Policy: Will You Keep More or Less of Your Income?

Every election season brings tax policy to the forefront. Candidates generally fall into two camps: those advocating for tax cuts to stimulate economic growth and those promoting tax increases to fund social programs and reduce inequality.

As a taxpayer, you need to understand how these policies could affect both your income and investments.

• Income Tax Rates: If you’re in or nearing retirement, income tax changes could affect how much you get to keep from your 401(k) withdrawals, pension, or Social Security benefits. Some candidates propose tax cuts for the middle class, while others suggest raising taxes on wealthier Americans. Depending on which side prevails, you may need to adjust your income strategy for retirement.
• Capital Gains Tax: If you’re an investor, capital gains tax is another important consideration. Currently, long-term capital gains are taxed at a lower rate than ordinary income. However, there’s been talk of increasing capital gains taxes, especially for high earners. A significant hike could affect how you approach selling investments or rebalancing your portfolio.
• Estate Taxes: Estate tax laws are also a potential target for reform. If you’re planning to leave wealth to your heirs, the tax implications of this election could impact how much of your estate they actually receive. Candidates who push for higher estate taxes could lower the current exemption limit, affecting estate planning for many families.

It’s worth noting that major tax policy changes often face legislative hurdles and may not be implemented exactly as proposed during campaigns. For example, the Tax Cuts and Jobs Act of 2017 underwent significant revisions before being passed into law.

Market Volatility: How Should You Protect Your Investments?

Elections often create uncertainty in the financial markets, which can lead to increased volatility. Investors might recall the market swings surrounding the 2020 election, where fears of political gridlock and pandemic-related concerns led to turbulence in stocks and bonds.

• Market Swings Are Common: Markets typically don’t like uncertainty. In the lead-up to the election, expect short-term volatility as polls fluctuate and policies are debated. Long-term investors should avoid making emotional decisions based on daily headlines. Instead, focus on maintaining a well-diversified portfolio.
• Sector Impact: Specific sectors often respond differently to election outcomes. For example, a candidate pushing for increased renewable energy investment may boost the performance of green energy stocks, while another who favors fossil fuel expansion could benefit traditional energy companies. Healthcare, defense, and tech sectors are also likely to see shifts depending on the administration’s priorities.

Retirement Programs: What’s the Future of Social Security and Medicare?

Retirement programs like Social Security and Medicare are top of mind for many voters, particularly those nearing or in retirement. The solvency of these programs has been a concern for decades, and each election brings fresh promises of reform, expansion, or cuts.

• Social Security: With the Social Security trust fund projected to deplete its reserves within the next decade, both parties acknowledge the need for reform. Some candidates propose increasing the Social Security tax cap, meaning higher-income earners would pay more into the system. Others suggest changes to the benefits formula or even raising the retirement age. Depending on how the election plays out, your future benefits could be affected.
• Medicare: Healthcare costs are a significant concern for retirees, and Medicare reform is a key issue. Proposed changes range from expanding Medicare to cover more services (or even lowering the eligibility age) to cutting costs by reducing coverage. Pay close attention to candidates’ healthcare agendas, as these decisions could affect your healthcare expenses in retirement.

Inflation and Interest Rates: Is Your Purchasing Power at Risk?

Inflation and interest rates are critical for both consumers and investors, and this election could influence policies that impact these factors. While inflation has been relatively under control in recent years, the COVID-19 pandemic and government stimulus packages pushed inflation higher in 2022 and 2023, affecting purchasing power.

• Monetary Policy: The Federal Reserve controls interest rates, but fiscal policies enacted by the government can indirectly impact inflation. Tax cuts, increased government spending, and trade policies all play a role in shaping inflationary pressures. A candidate who advocates for substantial government spending could fuel inflation, while one promoting austerity might take a more conservative approach.
• Impact on Investments: Rising inflation erodes purchasing power, and higher interest rates can depress stock and bond prices. Retirees relying on fixed income should particularly be mindful of inflation risk, as it could reduce the real value of their income streams over time.

Trade Policies: What’s the Impact on the Global Economy?

Global trade and international relations have become increasingly politicized issues. The direction that trade policy takes post-election can have significant implications for the U.S. economy and, by extension, your investment portfolio.

• Tariffs and Trade Wars: Trade conflicts, particularly with major economic players like China, can disrupt markets and lead to increased costs for consumers. Depending on the outcome of the election, tariffs could either be scaled back or expanded, potentially affecting industries such as manufacturing, agriculture, and technology.
• Global Supply Chains: A shift in trade policies could also influence the flow of goods and services across borders, impacting multinational corporations. If you’re invested in international funds or have exposure to large U.S. companies with global operations, be prepared for potential shifts in profitability and market performance based on trade policy changes.

Regulatory Environment: The Burden or Benefit for Businesses and Consumers

Lastly, the regulatory landscape will likely change depending on which party comes into power. More regulations could mean higher costs for businesses, while less regulation may lead to economic growth but potentially at the expense of consumer protections.

• Financial Sector: If you invest in financial stocks, regulation is key. A more tightly regulated banking industry can lead to lower profits for banks, which may impact share prices. Conversely, deregulation could boost bank stocks and create opportunities for higher returns.
• Consumer Protections: Some candidates advocate for increased consumer protections, particularly in the financial sector. Policies that restrict predatory lending, for example, can help individuals but may also slow down parts of the financial system.

How to Prepare: Protecting Your Financial Future

While you can’t control the outcome of the election, you can control your financial strategy. Here are some tips for preparing your portfolio and finances for any scenario:

• Diversify Your Investments: A well-diversified portfolio can help you weather market volatility, no matter which way the election goes. Ensure that your investments span various asset classes, such as stocks, bonds, and real estate, and consider global diversification to reduce risk.
• Don’t Make Emotional Decisions: It’s easy to get swept up in election fever, but remember that markets are forward-looking and often bounce back after periods of uncertainty. Stick to your long-term plan rather than reacting to short-term market movements.
• Review Your Financial Plan: Now is an excellent time to revisit your financial plan, particularly if you’re close to retirement. Ensure that your income streams are well protected and your portfolio is aligned with your goals and risk tolerance.
• Stay Informed: Keep an eye on tax proposals, retirement program reforms, and market trends as the election unfolds. Being informed will help you make better financial decisions post-election.

Navigating the Future

The 2024 presidential election is about more than politics; it’s about your future. By staying informed and proactive, you can position yourself for success regardless of the outcome. Regardless of market dynamics, a well-informed, long-term strategy is the best defense against election-driven volatility.

If you read nothing else read this – a wise white rabbit in Alice in Wonderland once said “Don’t just do something; stand there.” So unless you have solid reasons to make changes, now is not the time to reallocate your retirement portfolio.