As we approach the 2024 election, a look back at recent elections provides insights into how financial markets might respond to the coming months. Elections tend to introduce volatility in financial markets, especially as investors consider the potential economic policies of incoming administrations. While election outcomes alone do not dictate long-term market trends, they often trigger short-term adjustments based on policy expectations. The 2020 election stands as a pivotal example, showcasing how political shifts can ripple across markets.

The 2020 Election: An Unprecedented Year of Market Reaction

The 2020 election took place against the backdrop of the COVID-19 pandemic, economic uncertainty, and heightened political polarization. Markets initially experienced significant volatility leading up to Election Day, with investors uncertain about the potential economic policies of either candidate. As Election Day approached, market behavior was characterized by caution, with many sectors on standby until the results were confirmed.

On Election Day, markets began to reflect the broader mood of investors, and by the time results were confirmed in early November, market behavior quickly turned optimistic. The anticipation of substantial fiscal stimulus and pandemic recovery initiatives under the Biden administration led to a rally in growth-oriented sectors like technology, healthcare, and green energy. This post-election surge was one of the more notable responses, with the market reacting positively as the new administration’s policies focused on economic recovery.

Election Cycles and Market Volatility: Patterns from 2000, 2008, and 2016

Looking back over past election cycles offers valuable insights into how markets may behave in 2024. Each election brings unique factors, but historical patterns reveal several trends in how markets react before, during, and after elections:

• 2000 Election: The close and contested election between George W. Bush and Al Gore brought a period of extreme market uncertainty, which lasted for weeks until the Supreme Court determined the outcome. This delay led to increased market volatility, as the lack of clarity weighed on investor sentiment.

• 2008 Election: Barack Obama’s election occurred during the depths of the global financial crisis, with markets initially cautious yet hopeful for the prospect of economic recovery measures. The Obama administration's policies on economic stimulus and financial regulation reassured markets, which led to a period of gradual recovery.

• 2016 Election: Donald Trump’s unexpected victory caused an initial market dip; however, markets quickly rallied in sectors expected to benefit from his pro-business policies. Expectations of tax reform and deregulation bolstered market confidence, leading to a surge in energy, financial, and industrial stocks.

These cycles illustrate that while pre-election uncertainty typically prompts a conservative market stance, the initial post-election period often sparks a response aligned with perceived policy benefits.

The Financial Market Impact of Election Periods

1. Pre-Election Period
   Leading up to an election, markets typically experience a degree of caution as investors await clarity on candidates’ policy positions and anticipated outcomes. This period can see a slight dip in overall market confidence, as speculation builds about which party may secure victory and how policy changes could impact various sectors.

2. Election Day and Immediate Aftermath
   On Election Day and in the days following, markets respond directly to the results as they unfold. A widely anticipated victory may lead to a muted market response, while unexpected outcomes can prompt rapid adjustments. Investors often respond immediately to projected winners by rebalancing their portfolios according to anticipated policies, with sectors likely to benefit or face new challenges responding accordingly.

3. Post-Election Trends
   As the new administration takes office and clarifies its economic policies, markets generally enter a period of adjustment. For instance, sectors aligned with the new administration’s priorities—such as renewable energy under Biden—may experience an uptick, while others may face headwinds. This phase can involve significant sector rotation as investors shift focus to align with anticipated regulatory and fiscal approaches.

Preparing for 2024: What Investors Should Watch

As the 2024 election approaches, investors are likely to adopt strategies that protect portfolios from election-driven volatility. Key areas to monitor include proposed tax policies, environmental and corporate regulations, and trade agreements. Investors often consider hedging or diversifying their portfolios as a precaution against short-term election uncertainty. The sectors likely to see the most movement include:

• Energy: Policies on renewable energy and fossil fuels will impact this sector.
• Healthcare: Regulatory policies could affect pharmaceutical companies, insurance providers, and medical device firms.
• Financials: Tax reforms and regulatory changes will likely influence this sector.
• Technology: Policies around data privacy, antitrust regulation, and tech infrastructure could affect this highly influential sector.