{"id":17713,"date":"2024-03-14T22:24:25","date_gmt":"2024-03-14T20:24:25","guid":{"rendered":"https:\/\/www.liberalglobe.com\/?p=17713"},"modified":"2024-03-14T22:24:25","modified_gmt":"2024-03-14T20:24:25","slug":"could-the-us-election-lead-to-a-2008-style-crash","status":"publish","type":"post","link":"https:\/\/www.liberalglobe.com\/?p=17713","title":{"rendered":"Could the US Election lead to a 2008-style crash?"},"content":{"rendered":"\n

The US presidential election and market corrections go hand in hand. Given the rampant rhetoric between right and left, this is hardly surprising. This is especially the case in the last two presidential elections, where polarized candidates prevailed.<\/p>\n\n\n\n

From a portfolio management perspective, we need to understand what happens during election years to the stock market and returns.<\/p>\n\n\n\n

Since 1833, the S&P 500 has gained an average of 10.03% in a presidential election year. In contrast, the first and second years after a presidential election average gains of 6.15% and 6.94%, respectively.<\/p>\n\n\n\n

Of course, there are notable exceptions, such as in 2008, when the S&P 500 plunged nearly 37%. (Odds are based on price only and exclude dividends.) However, overall, the presidential election win rate is very high (76.6%).<\/p>\n\n\n\n

Since President Roosevelt’s victory in 1944, there have only been two defeats during the presidential election: 2000 and 2008. These two years corresponded to the “Dot.com Crash” and the “Financial Crisis.” On average, the second best performing years for the S&P 500 are presidential election years.<\/p>\n\n\n\n

For investors, with a “win ratio” of 76%, the odds that markets will likely close higher in the presidential election year of 2024 are high. However, given the current economic infrastructure, a more substantial correction is given a 24% chance of reconfirmation.<\/p>\n\n\n

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Given the recent 15-year run of the ongoing bull market, more extreme departures from long-term averages, and ongoing valuation issues, a \u201cVegas downside\u201d might increase those odds a bit. This divergence is most significant when looking at the one-year moving average. Current levels of divergence from the 52-week moving average have generally preceded short-term market corrections.<\/p>\n\n\n

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However, as mentioned, while the market will likely end the year higher than it started, presidential election years bring corrections.<\/p>\n\n\n\n

Will policies matter?<\/strong><\/p>\n\n\n\n

The short answer is “Yes”. However, not in the short term. Presidential platforms are “advertised” mainly to get your vote. Therefore, a politician will promise many things that, in retrospect, he will rarely deliver. So while there is a lot of debate about whose policies will be better, it doesn’t really matter, as all candidates are usually indulging in wanton provision through continued debt increases.<\/p>\n\n\n

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However, when it comes to financial markets, Wall Street tends to be averse to change. With the current President, Wall Street understands “riding”. The risk for the election is a policy shift that could undermine current trends.<\/p>\n\n\n\n

Such changes could be tax hikes, restrictive trade policies, spending cuts, etc., which would be unfriendly to financial markets in the short term.<\/p>\n\n\n\n

This is why markets tend to correct before the November election. A look back at all election years since 1960 shows that markets actually went up during election years. However, note that the market tends to correct during the months of September and October.<\/p>\n\n\n

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It is worth noting that this data is heavily skewed by the drop during the 2008 “Financial Crisis”, also a presidential election year. If we extract that one year, returns jump to 7.7% in election years.<\/p>\n\n\n\n

However, in both cases, yields continued to decline during September and October. The chart below shows that 2024 is well ahead of historical standards.<\/p>\n\n\n

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Finally, while policies matter in the long run, as changes in spending and regulation affect economic outcomes, market performance during bull market periods varies widely.<\/p>\n\n\n\n

During (long-term) bull markets, as we have now since 2009, presidential election years tend to average nearly 14% per year. This contrasts with bear markets, which tend to decline by 7% on average.<\/p>\n\n\n

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However, a risk that has been taking shape since the ‘Financial Crisis’ could have an external impact on markets in 2024.<\/p>\n\n\n\n

The Great Schism<\/strong><\/p>\n\n\n\n

Although you may be a follower of one party or the other regarding politics, it doesn’t really matter about your money.<\/p>\n\n\n\n

This is especially true today. As we head into November, for the third straight election term, voters will vote for the candidate they dislike least, not the one whose policies they like best. More importantly, most voters go to the polls armed with large amounts of misinformation from social media that promotes political agendas.<\/p>\n\n\n

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The only thing the markets seem to prefer is “political gridlock”.<\/p>\n\n\n

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    \n
  • \u201cA divided Congress historically is good for stocks, which tend to like the fact that one party doesn’t have much influence.<\/li>\n\n\n\n
  • Stocks gained nearly 30% in 1985, 2013 and 2019, all amid a split in Congress, according to LPL Financial.<\/li>\n\n\n\n
  • The average S&P 500 gain with a divided Congress was 17.2% while GDP growth averaged 2.8%. \u2013 USA Today<\/li>\n\n\n\n
  • What we can glean from the data is the odds suggest the market will end this year on a positive note.<\/li>\n\n\n\n
  • However, that says little about next year.<\/li>\n\n\n\n
  • If you go back to our data table above, Year 1 of a new Presidential cycle is about a 50\/50 outcome.<\/li>\n\n\n\n
  • It is also the lowest average yield year, dating back to 1833.<\/li>\n\n\n\n
  • Moreover, from the election to 2025, the results depend too much on many things continuing to go “right”.<\/li>\n<\/ul>\n\n\n\n
      \n
    1. Avoiding a “double” recession. (Without more fiscal incentives, this is a reasonable risk.)<\/li>\n\n\n\n
    2. The Fed expands monetary policy drastically.<\/li>\n\n\n\n
    3. The consumer will need to expand debt-based consumption.<\/li>\n\n\n\n
    4. There is a marked improvement in both corporate profits and profitability.<\/li>\n\n\n\n
    5. Extensions continue. These risks are undoubtedly possible.
      However, when combined with the longest bull market in history, high valuations and excessive speculation, the risks of something going wrong increase.<\/li>\n<\/ol>\n\n\n\n

      Locations<\/strong><\/p>\n\n\n\n

      In recent weeks, we have repeatedly discussed risk reduction, hedging and rebalancing portfolios. Part of this was undoubtedly due to the excessive rally from the November lows and the possibility of an unexpected election result.<\/p>\n\n\n\n

      The possibilities we need to consider are:<\/p>\n\n\n\n

        \n
      1. If the market corrects, then in a way the market clears.<\/li>\n\n\n\n
      2. If the market continues to rally, then the portfolio has been cleared and new positions can be added.<\/li>\n<\/ol>\n\n\n\n

        No one knows for sure where the markets will be headed next week, much less the next month, quarter, year or five years. What we do know is that not managing ‘risk’ to offset the downside is detrimental to achieving long-term investment goals.”<\/p>\n\n\n\n

        As highlighted, the odds suggest that markets will rise regardless of the election outcome. However, these are averages. In 2000 and 2008, investors did not “average”. That’s why it’s always important to prepare for the unexpected.<\/p>\n\n\n\n

        Keeping some extra cash, increasing your position in Treasuries and adding some “value” to your portfolio will help reduce the risk of a sharp decline in the coming months.<\/p>\n","protected":false},"excerpt":{"rendered":"

        The US presidential election and market corrections go hand in hand. Given the rampant rhetoric between right and left, this is hardly surprising. This…<\/p>\n","protected":false},"author":1,"featured_media":17724,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[390,819],"tags":[1897,779,5259,3918,1054,215,70],"class_list":["post-17713","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-politics","category-usa","tag-american-elections","tag-elections","tag-financial-crash","tag-markets","tag-stocks","tag-us","tag-usa"],"_links":{"self":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/17713","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=17713"}],"version-history":[{"count":1,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/17713\/revisions"}],"predecessor-version":[{"id":17723,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/posts\/17713\/revisions\/17723"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=\/wp\/v2\/media\/17724"}],"wp:attachment":[{"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=17713"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=17713"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.liberalglobe.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=17713"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}