MIKE TOWNSEND: It probably goes without saying that investor anxiety about this year's election is high. There's an unusual amount of uncertainty surrounding the presidential race, from concerns about the age, health, and mental acuity of the two candidates, to the legal troubles facing the former president, to a host of unpredictable geopolitical factors.
There is also a deep lack of enthusiasm about the candidates themselves. A January poll from Decision Desk HQ and The Hill newspaper found that 59% of registered voters were unenthusiastic about the potential rematch. In another January poll, this one from Reuters, 67% of respondents said they "want someone new" as a choice in this presidential election.
Investors are especially concerned about how this election could impact the markets. In Schwab's most recent Trader Sentiment Survey, released two weeks ago, 42% of active traders surveyed said that they thought the presidential election would have the greatest impact on the stock market in 2024. By comparison, the two dominant topics in the financial world over the last three years, the federal funds rate and inflation, came in second and third, respectively, in that same survey.
The election is causing a lot of anxiety and uncertainty―and generating a lot of emotion among investors. So how do we keep things in perspective and manage our portfolios as the intensity of this election year progresses.
Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.
Questions on the tie between presidential elections and the markets are front and center at my speaking events these days. And Schwab financial consultants across the country are reporting that clients are voicing concerns about what this upcoming election could do to the markets.
We've answered some election year questions on this podcast over the last few months, but with the level of interest we are hearing, I thought it would be useful to really dive into it and tap into the vast pool of data that our Schwab Center for Financial Research has compiled. It's really quite enlightening, and I'll share it all with you in just a few minutes,
But first, here are my three things to know about what's going on in Washington right now.
First, this week presents yet another chapter in the long-running saga of whether the government will shut down. As this week began, Congress still had not passed any of the 12 appropriations bills that fund every government agency and every federal program, despite the fact that we are now more than five months into the fiscal year that started back on October 1.
Congress passed short-term extensions of government funding in September, in November, and again in January. The extension in January set two deadlines―March 1 for a handful of agencies and March 8 for the rest of the government.
Facing that first deadline last week, Congress punted again. They reset those two deadlines to March 8 and March 22, respectively.
Over the weekend, Congressional leaders unveiled a bill that packages together six of the 12 appropriations bills. It's nearly 1,100 pages long and allocates about $460 billion in spending―which is still less than 30% of the entire budget. It is expected to pass both the House and Senate by Friday's deadline, though as we've seen over the last 14 months, absolutely nothing is a sure thing in this Congress.
But the much trickier negotiations are still to come, because the remaining six appropriations bills, the ones that face a March 22 deadline, include the most complicated and controversial ones, such as Defense and Homeland Security. Getting those across the finish line in two weeks will be a huge challenge. Congress may have to pass another temporary extension of funding, but we can't rule out a partial government shutdown later this month.
There are two other big legislative issues that I'm watching, and both are in a state of limbo right now.
One is the foreign aid bill that has already passed the Senate with strong bipartisan support―that's the bill that includes $95 billion in aid for Ukraine, Israel, and Taiwan, as well as humanitarian assistance. House Speaker Mike Johnson has continued to be non-committal about bringing that bill up for a vote in the House. At a White House meeting last week with the four Congressional leaders and the president, Johnson came under intense pressure from the other participants about how dire the situation in Ukraine has become. The bill would undoubtedly pass the House with plenty of room to spare. But Speaker Johnson's problem is a political one, in that a majority of his Republican members oppose more aid to Ukraine, arguing that the priority should be improving U.S. border security before aiding other countries. That's why he is reluctant to bring up the bill in the House.
The tax bill is in the opposite situation―it has passed the House but has not yet been considered in the Senate. That bill is relatively modest―it pairs an expansion of the Child Tax Credit, which is a top priority for Democrats, with the extension of several business tax breaks, which is a priority for Republicans. That bill passed the House last month with overwhelming bipartisan support. But it's been delayed in the Senate as senators bicker over a few details in the bill.
Both of these bills could be tied to the government funding measures. The Ukraine aid bill is not likely to move in the House until after the government funding process is finished. But the tax bill is a candidate to be attached to one of the government funding measures, so there is a lot still to watch here.
Finally, one other note from the week. On Wednesday, the SEC finalized a long-awaited rule requiring public companies to disclose more to investors about the risks they face from climate change. It's controversial, to say the least, and it's likely to be challenged in court.
But at the same meeting, the SEC also approved another rule that may have a more direct impact on investors. It's a rule requiring brokerages like Schwab to provide investors with more information about how their trades were executed. When you make a trade, you are required by law to get what is known as "best execution"―basically, your brokerage must find the very best deal for you at the time of your trade and get you that deal. But it's hard for investor to know if that's really happening, as the trading process for most stocks happens really fast without the investor knowing much about how, why, or where it happened. This new requirement will give investors much more information about each trade. Some investors will want to know every last detail. Some investors probably won't care that much. But generally speaking, more transparency into the process should be good for investors overall.
On my Deeper Dive, I want to explore some questions I've been getting from investors recently about the 2024 election, how presidential elections typically impact the markets, why congressional elections are so important to the market, and how to think about the investing implications of election uncertainty. Let's begin with a quick overview of the state of the presidential race.
While the candidates have not quite officially clinched the nominations of their parties, a rematch between President Biden and former President Trump is all but certain. And polls have been very consistent in showing a close head-to-head race. RealClearPolitics, which aggregates polls, shows Trump with about a 2.5-point lead. Decision Desk HQ and The Hill newspaper also provide a tracker, which currently shows Trump with an average lead of 2.8 points. The gap between the two candidates has remained remarkably steady, staying within a range of 3 points or less in one direction or the other. Statistically, the race has been essentially tied for more than a year.
Of course, polls measure the popular vote, which is not how we elect presidents. That's why I don't think there is a lot of value in the day-in, day-out national polls, despite the breathless reporting that you will see about them over the next eight months. It's the Electoral College that matters, and once again the Electoral College will come down to a handful of battleground states. This year, I am focused on seven: Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin. Most pundits agree that those seven states will determine the next president.
But there's another factor in this election that makes relying on polls particularly challenging: the presence of third-party candidates. In some surveys, independent Robert F. Kennedy, Jr., is polling in double digits. Add in progressive intellectual Cornel West and Green Party candidate Jill Stein, combined with the close margin between Biden and Trump, and it's easy to see that third-party candidates could have an enormous impact on the outcome in November.
A couple of things to know about third-party candidates. First of all, independents like Kennedy have a huge hurdle to overcome, and that is qualifying for the ballot in every state, which usually requires collecting many thousands of voter signatures. Each state has different rules and different deadlines for gaining ballot access. As of March 1, Kennedy had only qualified for the ballot in one state―Utah. He has a major operation underway to get on the ballot in other states, and his campaign says he has collected the necessary signatures to get on the ballot in five more states, including the battleground states of Arizona and Georgia. But right now, it's just not certain how many states will have Kennedy, West, or Stein on the ballot in November.
The other question about third-party candidates is trying to decipher which of the two major-party candidates they might impact the most. There has been a lot written about this already, and there will be plenty more written in the months ahead, but my suggestion, again, is to pay no mind to it now. We are only in March, and support for independent candidates historically has decreased as Election Day approaches. It's thought that may happen because, months before the election, it's easy to respond to a poll and say you might favor a third-party candidate, but it's harder to actually cast your ballot that way on Election Day.
In 2020, third-party and independent candidates took less than 2% of the popular vote. But that was down from 6.1% in 2016, which was itself a bit of an outlier. Third-party candidates had not attracted that level of support since 1996, when Ross Perot took more than 8% of the vote.
In 2016, the two major party candidates, Hillary Clinton and Donald Trump, both had low approval ratings, which likely led to the more than 6% of voters who chose other candidates. Third-party and independent candidates ended up playing a huge role in the outcome. For example, in Michigan in 2016, a state that Trump won by fewer than 11,000 votes, more than 275,000 votes were cast for candidates other than Trump or Clinton.
With both Trump and Joe Biden having low approval ratings in 2024, it may be that once again third-party candidates attract a higher than usual percentage of the vote―and that could have a significant impact on the race.
There has been some polling this year that indicates that Kennedy and the other candidates are drawing a bit more from Biden's support than they are from Trump's support, but again, it's very early. And there have been relatively few polls that have looked at the three-way race among Biden, Trump, and Kennedy, or the five-way race that emerges when you add West and Stein to the mix.
My final thought on third parties is that, historically, third parties have not fared very well in the key battleground states. If we look at the elections from 1980 to 2020, third-party candidates received their highest percentage of the vote in states like Alaska, Utah, Oregon, New Mexico, and Wyoming―none of which are expected to be close in this election. Battleground states like Georgia, North Carolina, and Pennsylvania have typically been below the national average in terms of the percentage of votes cast for third-party candidates in presidential elections. That said, the race is expected to be so close in those seven battleground states that even a relatively low performance by third-party candidates could tip the results.
One other thought about the presidential race. Over the past few months, I've been getting a lot of questions at my client events about what would happen if either Biden or Trump decided to or was forced to drop out of the race. A health scare would be the most likely cause, or perhaps one of the legal cases results in a conviction of the former president. The answer to that is that the situation would most likely be resolved at the party conventions. Republicans will gather in Milwaukee in mid-July, Democrats in Chicago in mid-August. The delegates at the convention would then choose the nominee, under a process outlined in each party's rules. It would be messy and chaotic, but it is possible.
I think such a scenario is highly unlikely, but I do believe that a major candidate dropping out would spark significant market volatility. Markets like certainty, and while this presidential race may be all kinds of crazy in some ways, there isn't a lot unknown about the two candidates. Voters, investors, the markets know these candidates, know their policy positions, know their strengths and weaknesses. A late change in the candidate on either side would likely be concerning for the markets, as it would add to the list of unknowns.
So that's a bit of the lay of the land for the 2024 presidential race. Now, let's turn our attention to the topic I get the most questions on these days, "How do the markets react to presidential elections?"
Generally speaking, markets have performed solidly but not spectacularly in presidential election years. Since 1928, election years have averaged about a 7.5% return, which is below the average of 9.9% for all years. In the four-year presidential cycle, it's the third year that has historically been the best performing year. 2023 was the third year of Joe Biden's four-year term, and it was a good one―the S&P 500® rose by more than 24% last year. That boosted the third-year average return to nearly 14%. The second-best performing year has historically been the fourth year, election year.
The other good news about the markets in presidential election years is that they have rarely declined. Since 1952, markets have only declined in a presidential election year three times―1960, 2000, and 2008. Interestingly, all three of those years were an "open" presidential election, meaning the incumbent was not running for re-election. Even though we know that past performance does not guarantee future results, the market has risen in 13 consecutive presidential years when there was an incumbent running for re-election, regardless of whether he won or lost the race.
Another aspect of the election we looked at is whether or not there is any immediate reaction in the markets to the final election outcome. Volatility is common in the run-up to an election as the markets deal with uncertainty of who might win and what the implications might be for policy issues. But once the election outcome is decided, there is no "typical" reaction from the markets.
We looked at the last six presidential elections and how the market performed the day after the election, a week after the election, and a month after the election. In three of those elections, the market was up at each of those markers. And in the other three elections, the market was down. All of which underscores the notion that the markets are not considering the election itself a real driver.
The individual sectors are also on investors' minds, and I frequently get asked whether certain sectors perform better in election years than others. And once again, there is no clear pattern. Over the last eight presidential elections, going back to 1992, the information technology sector has performed better, on average, than any other sector. But as my good friend and colleague Liz Ann Sonders always says, "Analysis of an average leads to average analysis." And that means we have to look into what's behind those numbers.
The information technology sector has the best performance on average, but it has a wildly different range of outcomes depending on the year. Let's just look at the last eight presidential election years, from 1992 to 2020. In 2000, when the tech bubble burst, the sector suffered a 41% loss. In 2020 it saw a nearly 44% positive return. It also saw a good return in 1996, but in all of the other presidential years since 1992, it was in the bottom half of sector performance, and it was the worst or second-worst performing of all the sectors in two of those years. As a result of this wide range, the fact that the information technology sector's average is the highest doesn't give investors an honest picture of how the sector has performed. And that's true across all the sectors―there's just not any discernible pattern from election to election.
The sector analysis is an important illustration of what really matters. Sector performance is driven by the economic conditions, by company earnings, by consumer behavior, and many other factors. Apparently, it's not driven by who is in the White House.
But there is one way that Washington can and does have an impact on sectors. It's not the election outcome, or the makeup of Congress, it's what lawmakers actually do that can have a real impact on sectors. It's the laws that Congress passes that can create winners and losers across and within sectors.
And that's why it's important to remember that while the presidential race will undoubtedly get the most media attention between now and November, for the markets and investors, the battles for control of the Senate and the House of Representatives are more important. Presidential candidates and presidents can propose all the ideas that they want, but it's Congress who must turn those ideas into actual laws. And what does or does not pass Congress has a much more direct impact on the markets than who sits in the White House. Congress can pass laws that boost a sector or a group of companies―sometimes even one company.
I'll give you a couple of examples. In 2021, Congress passed the CHIPS and Science Act, a law that is aimed at boosting the domestic manufacturing capability for things like semiconductors and other high-tech items. As a result of that law, companies suddenly had significant incentives to build manufacturing plants here in the United States. And they are doing so, with more than 50 plants now in various stages of planning or construction. And the market has approved―in the year after the CHIPS Act was signed into law, a portfolio of companies in the S&P 500's Semiconductors and Semiconductor Equipment Industry Group outperformed the S&P 500 itself by more than 38%.
In 2022, Congress passed a big infrastructure bill, which is making hundreds of billions of dollars available to build or improve roads, bridges, airports, and other projects. The bill has been good for companies that manufacture big machines used to make roads, as well as other types of companies that are involved in producing materials. In the year after that bill became law, a portfolio of companies in infrastructure-related industries outperformed the market by more than 8%.
Because the Democrats had control of the White House, the Senate, and the House in 2021 and 2022, they were able to get these laws passed. But control of the House flipped in the 2022 midterms, and it's been much more difficult in 2023 and early 2024 for Congress to pass big legislation―or, really, much of any legislation at all, because of the split Congress.
This year's battle for control on Capitol Hill will be particularly interesting―not just because we currently have split control and unprecedented narrow margins in both chambers. But next year's Congress will be facing some huge policy debates that will have an impact on the market, including another debt ceiling deadline and the looming expiration at the end of 2025 of all the 2017 tax cuts. That includes the lower corporate tax rate, lower individual tax rates, the higher standard deduction, and the higher exemption amount from the estate tax, which is a key figure to know for estate-planning purposes. How these issues play out next year will be determined, in part, by what the balance is between control of the White House and the two chambers of Congress.
So what am I watching for? In the Senate, where Democrats currently hold a 51-49 margin, there are 34 seats on the ballot. Twenty-three are held by Democrats, and 11 are held by Republicans. Three of those Democrats are the only three who currently represent a red state―Montana, Ohio, and West Virginia. Those will be very competitive races, as will races for Democrat-held seats in Nevada, Michigan, and Pennsylvania, and the seat in Arizona, which is currently held by an independent senator who caucuses with the Democrats. None of the Republican-held seats are expected to be very competitive, although some analysts are keeping an eye on Senate races in Texas and Florida. So the playing field is very good for Republicans looking to capture the two seats they need to flip control of the chamber.
Over in the House, the current margin is 219-213 for Republicans, with three vacancies that will be filled in the coming months via special elections. But Democrats have a good shot at flipping the chamber this fall. There are 18 Republicans in the House who represent districts that Joe Biden won in 2020―meaning highly competitive, or "swing," districts. There are just five Democrats who currently represent a district that was won by former President Trump in 2020. That signals a good opportunity for Democrats to regain control of the House.
And here's an amazing fact: If that happens, if the Senate flips to the Republicans and the House flips to the Democrats, it will be the first time in history that the House and Senate have flipped in opposite directions in the same election.
I'll be paying a lot of attention between now and November to key House and Senate races.
One more question about elections and the markets that I have been getting a lot recently. Instead of looking at how the markets react to an election, it flips the ideas around to ask if there are any good economic and market predictors of an election outcome? Here are a couple of interesting ones.
First, there is a perfect correlation, over more than a century, between recessions and re-election: If the country has been in a recession within two years before the election, the incumbent loses. The last six presidents who ran for re-election within two years of a recession lost their re-election bids: Trump in 2020, George H.W. Bush in 1992, Jimmy Carter in 1980, Gerald Ford in 1976, Herbert Hoover in 1932, and William Taft in 1912. In fact, these are the only six presidents who have lost a re-election bid since 1900. If there was no recession, then the incumbent won re-election. For 2024, it feels like this one is right on the edge, as there is significant disagreement among economists about whether we have already had or will be in an official recession.
Here's another fun correlation. Stock market returns in the three months before an election―August, September, and October―have correctly predicted 20 of the last 24 presidential races. If stocks are up in those three months, the incumbent usually wins. If stocks are down, the incumbent usually loses. So keep your eye on the markets starting in August.
I want to close with three big takeaways from looking at all this data and information about markets, investing, and elections.
First, just a simple reminder that economic data―consumer confidence, jobs reports, housing numbers, inflation―is much more important to market performance than any election outcome. There is very little data that suggests that the election itself has any major impact on the markets. Media coverage of the election will be overwhelming between now and November. But investors should remember that, from a market perspective, that's mostly just noise.
Second, for more than a century now, the market has grown steadily and consistently regardless of which party was in control of White House and/or Congress. Of course, there have been significant downturns in the market during that time. But even the worst downturns―the Great Depression, the bursting of the tech bubble at the turn of the century, the financial crisis of 2008―were not a direct result of an election outcome, who was president, or who controlled Congress. And markets eventually recovered from all of them.
Here's the best illustration of why it's important to stay invested regardless of the politics of the moment. Imagine you had invested $10,000 in an index of large-cap U.S. stocks at the beginning of 1961. According to calculations by the Schwab Center for Financial Research, using data provided by Morningstar, if you only invested when a Republican was president, that $10,000 investment would have grown to about $102,000 at the end of 2023. If you had only invested when a Democrat was in the White House, you'd have just a little over $500,000. But if you had left that money invested the entire time, regardless of which party was in the White House, you would have had more than $5.1 million at the end of 2023.
And finally, my biggest takeaway isn't rooted in data or past election results. It's a reminder that elections are emotional. This election is likely to be very emotional, particularly with two unpopular candidates framing their opponent as a threat to democracy. It's likely to feel exhausting and dispiriting. But don't let those emotions govern your investing decisions.
And that's true, not just between now and the election, but in the weeks right after the election. Plenty of evidence suggests that individuals perceive the markets to be less risky and more undervalued when their party wins, and if their candidate loses, they see things as riskier and more overvalued. That outlook can lead to poor investing decisions.
So as always, remember that the best way to deal with uncertainty is to use asset allocation to produce a diversified portfolio. Make a plan and stick to it, regardless of what happens during the months of campaign rhetoric or even November's election itself. If you have questions or concerns, talk to a financial professional to get the support you need. And don't let emotions dictate your investing strategy.
Well, that's all for this week's episode of WashingtonWise. I want to give a shout out to Brayton Brandt at the Schwab Center for Financial Research for his great work gathering data and crunching a lot of the numbers I referenced in this episode about how markets perform during election years.
We'll be back with a new episode in two weeks, talking about one of the largest government programs―Medicare―and why it is important to understand it no matter your age. Take a moment now to follow the show in your listening app so you don't miss an episode. And if you like what you've heard, leave us a rating or a review—those really help new listeners discover the show.
For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript.
I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.
