One of the most common questions I get asked is, “do you think the election is going to cause the market to crash this year?”
My typical response is, “No. Why would it?”
The stock market just isn’t that personal. You might have strong political convictions and are convinced that the world/democracy/America is doomed if the opposing party’s candidate gets elected. The market’s interest in the election is far less personal.
Although people conflate the stock market’s performance with “how things are going generally,” that’s not really what the stock market is meant to do.
The stock market is a place where people buy and sell shares of companies (ie, stocks). Those companies trade at prices that reflect investors’ expectations for the future performance of that company. Companies trade at high valuations when expectations for future performance are high, and companies trade at low valuations when expectations for future performance are low. Those valuations are adjusted continually to account for changing expectations.
Here’s the problem with the “stocks crash during an election” thesis. The expectation that there will be an election is already fully baked into current valuations. We’ve known for 4 years that there would be an election this year. In fact, we’ve known far longer than that! Anyone in 2000 would have told you with reasonable confidence each year that an election would take place over the next 50 years, including 2024. And-spoiler alert- there will be another one in 2028, 2032, 2036, etc.
Some people will tell you this election is special because it features unusually unlikeable or contentious politicians. But I remember something Charlie Munger said which really stuck with me. Paraphrased, it was something like, “each generation of new politicians makes you miss the old ones.” This is an increasingly common sentiment today, but the fact that Charlie Munger was saying this when he was 99 years old suggests that this probably isn’t a new phenomenon.
Unless a politician is so awful that they single-handedly ruin the US economy (and along with it the profitability and growth prospects of all the companies that comprise the S&P 500), elections just don’t drive the market that much. For the most part, elections don’t change how many iPhones Apple will sell, how many ads get clicked on Google, or how much stuff people order to their house from Amazon. Yet it is factors like these that drive business performance at the biggest companies in the stock market.
In the long run, corporations grow their earnings about 8% a year, and you’re better off just holding on to those companies than trying to impose your own political fantasies on the stock market.
But maybe you are still unconvinced and believe that politicians are so powerful that they actually can drive the stock market. Well, in that case, wouldn't said politicians try their hardest to make sure the stock market mostly goes up? In fact, Federal Reserve chairs such as Jerome Powell (and Yellen before him) are routinely accused for using monetary policy to inflate asset prices. After all, stock market performance is one of the biggest predictors of presidential approval ratings, and so people assume there's a quid-pro-quo between Fed Chairs and the sitting president.
Trump seems to have done everything in his power to make the stock market go up. He tweeted about it all the time, back when he was still allowed on Twitter. Yet stock market performance was pretty typical. Some good years, some bad. The stock market under Biden has been pretty similar. Both these guys wanted it to go up, why wouldn't they?
This may be wishful thinking on my part, but part of me thinks that if election years really mattered for the stock market, the opposite of most people's fears would play out. Incumbent politicians would do everything possible to make the market go up, theoretically making election years a better time than ever for the stock market. But instead, the data suggest that election years aren't too different from any other year. At least not in a statistically significant way. All the different factors that come with an election (the uncertainty, potential for regulatory and tax changes, political ad spending) seem to either cancel each other out, or not add up to a big enough difference to overwhelm all the other inputs to stock market performance.
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