Presidential Election Years and Weaker Equity Returns
With the 2024 U.S. presidential election only 12 months away and the primary season commencing on Jan. 15, Goldman Sachs' portfolio strategy research team sheds light on the historical trends of equity returns in the lead-up to a presidential election. According to Goldman, the 12 months prior to a presidential election tend to see weaker-than-average returns for the S&P 500. Since 1984, the average return for the S&P 500 during election years is a mere 4%. In comparison, the index has averaged returns of 7% during election years and 9% outside of election years when considering data from 1932.
Defensive Sectors and Heightened Uncertainty
Goldman Sachs' chief U.S. equity strategist, David Kostin, notes that defensive sectors tend to perform best in the run-up to presidential elections, reflecting the elevated uncertainty that typically characterizes this period. The St. Louis Federal Reserve's Economic Policy Uncertainty Index supports this observation, showing a consistent rise from late summer to a peak on Election Day. Options markets also reflect the increasing uncertainty in the weeks leading up to Election Day, as indicated by the rising October VIX Future premium and policy uncertainty measure.
Performance of Tech and Defensive Sectors
Historically, the technology sector has been the worst-performing sector during election years, with a median decline of 5 percentage points compared to the S&P 500. Within the tech sector, hardware and semiconductor industries tend to be the weakest performers. On the other hand, utilities and consumer staples have consistently delivered the highest median returns before presidential elections over the past four decades, surpassing the S&P 500 by five and four percentage points, respectively.
Despite recent election cycles being influenced by recessions in 2000, 2008, and 2020, Goldman Sachs acknowledges that weakness remains in the broad market index, with a 9% return compared to the average of 11% since 1984 when excluding the three recessionary years. However, investors can find solace in the weeks following the election as uncertainty recedes. In the median election year since 1984, the broad market index has gained 5% in the eight weeks from Election Day until the year-end, nearly double the returns over the same period in a non-election year.
In conclusion, while presidential election years often see weaker equity returns, investors can anticipate stronger post-election returns, particularly in cases where the election results in a divided government. As the 2024 election approaches, market participants will closely monitor these historical trends to inform their investment strategies.
Presidential Elections and Their Impact on New Business Formation
As the 2024 U.S. presidential election draws near, new businesses should be mindful of the potential financial implications. According to Goldman Sachs' portfolio strategy research team, the year leading up to a presidential election typically sees weaker-than-average returns for the S&P 500. This trend, dating back to 1984, could influence the financial strategies of new businesses.
The Role of Uncertainty
The heightened uncertainty that characterizes the run-up to presidential elections is a significant factor in these weaker returns. As Goldman Sachs' chief U.S. equity strategist, David Kostin, notes, defensive sectors often outperform during this period. This trend is supported by the St. Louis Federal Reserve's Economic Policy Uncertainty Index, which typically rises from late summer to peak on Election Day.
Implications for Sector Performance
Interestingly, the technology sector, a popular choice for new businesses, has historically been the worst-performing sector during election years. Conversely, utilities and consumer staples, often regarded as defensive sectors, have consistently delivered the highest median returns in the lead-up to presidential elections.
Despite the weaker returns typically seen in election years, the post-election period often brings stronger returns as uncertainty recedes. This trend is particularly evident when the election results in a divided government.
In light of these historical trends, new businesses should consider the potential impacts of the upcoming election on their financial strategies. By understanding the patterns of the past, they can better navigate the uncertainty of the future and position themselves for success in the post-election landscape.