Allied Election Year Special

Allied Election Year Special

February 13, 2024

For better or worse, we are marching headlong into the 2024 Presidential election cycle.  I aim to offer you dispassionate context for what may be passionate process, but I’ll begin where I will also end: you should not come to your investment decisions while peering through a political lens. 

First, Policy Matters…

We can look at several recent changes to economic policy to identify clear cause and effect patterns in the market.  I’ll provide an example from the Trump Presidency – the corporate tax cuts of 2017, which cut taxes on every corporation in America by 15%.  It logically followed that every corporation in America was suddenly at least 15% more profitable than it had been the prior year, without any need to innovate or improve.  On the expectation of faster returns on those attractive company profits, stock investors were willing to pay more for their stocks and the market rallied heavily. So in that case, policy impacted stock markets relatively quickly; however, tax cuts of that type are also like giving sugar to a toddler – they start vibrating pretty quickly, but the impact wanes before too long.

Is it possible to invest based on perceived or anticipated trends like this?  Sure, but the problem with doing so during an election cycle is multi-fold.  Even in the case where a change might have a more lingering effect, there are few signals and lots of noise.  Constant promises about policy with less clarity or confidence about what (if anything) will change leave people acting on speculations and emotions.  As we’ve said so many times before – you should not make investment decisions based on emotions and few environments are more emotionally charged than an election cycle.  These days, at any given moment fully half the country is upset with the political landscape.

This is one major reason we hesitate to support making BOLD changes to portfolios during election cycles.  Instead, we suggest sticking to your long-term plan and risk tolerance.

Are there trends that are worthwhile acknowledging? 

We’ll spend some time exploring those observations here.  To THE CHARTS!

4 Year Presidential Terms and the Market

I will continue to lean on Mark Twain who said, “History never repeats itself, but it does often rhyme.”  While the past doesn’t predict the future, there have historically been patterns in market reactions to election years (and the subsequent years of each term).  The composite chart below illustrates the best fit trajectory of the market (Dow Jones Industrial Index) considering all of the election cycles going back to 1900. 

These patterns have been relatively consistent over time and offer insights: Election years tend to have outsized volatility through the first half of the year, a bit of a rally exiting the summer, a dip into the fall and the last days before the election, and then a slight relief rally as we head for the door.  The year-end rally is typically dependent on having certainty around the election.  Should we spend a couple months litigating winners and losers, the relief rally may very well evaporate.  There are compelling lessons to consider for 2024, but also for the ensuing years.

While policy matters, we shouldn’t lose sight of the idea that companies in the United States of America have a long history of navigating the impact of policy changes.  They adapt over time seeking profitability and markets REALLY care about profitability.

Political Affiliation and Control of the Government

 I’m sure you’re asking - won’t the winners and majorities factor into the success of your portfolios?  The answer is a robust and resounding… maybe!  I know, a bit of a letdown but you’ll be able to draw your own conclusions in a moment.  Let’s look at some comparisons.

Below are two charts illustrating the growth of the economy (GDP) on the top and the returns of the stock market (S & P 500 market weighted index) on the bottom.  Each provide an accounting of the respective performance under varying government control: All Republican, all Democrat and divided government.  The data goes back to 1947, so we’re talking about almost 80 years of history.


What conclusions can we draw?  At first glance you’ll likely notice that GDP or economic output has been greater, on balance, under Democratic control while stock market performance has been better under Republican control.  However, given the nature of economic policy and the time it takes for changes to actually have an impact, it has been very difficult to point to specific policies and hold them up as the driver of performance.  Academic studies have sought to confirm these correlations over time without much success, but I do think we can form some reasonable conclusions.

First, it makes sense that GDP overall would be higher under Democratic control.  When Democrats control all three branches of government, we generally see greater government spending focused into social safety nets and programs to assist lower income Americans.  You might ask, “How does this translate to greater economic output?”  The primary reason is that Americans in the lowest income groups spend ALL of the money they receive from those programs, so the government’s spending enters the economy almost entirely. 

By comparison, and drawing from our earlier example, Republicans tend to focus their support on top-down economic policies that usually involve tax cuts of various types.  Tax cuts disproportionately benefit higher income earning households.  However, because those households usually have disposable income, the benefit of the tax cut does not make its way into the economy at the same pace.  Instead, a greater proportion of the tax cuts will ultimately find their way into savings accounts and investment portfolios – resulting in higher stock prices.

You can debate which is better for the country, but these patterns seem to exist for a tangible reason. 

It’s also important to note that we have had a divided government during the greatest overall duration of time.  Further, regardless of political affiliation, economic GDP and market performance are both more frequently in positive territory than negative.  I hope you can take solace in this because it would be a different matter entirely if we recognized consistently negative impacts to the economy or markets based on the political party that’s temporarily running the show.

It’s My Party and I’ll Cry if I Want To

Remember how we’re not supposed to invest with our emotions?  Here’s a good reason why:


This chart illustrates how consumers of different political affiliation FEEL about the economy when surveyed.  What’s interesting is that those who identify themselves with the party in power have far greater feelings of positivity about the state of the economy, regardless of the actual prevailing conditions.

Notice how the red line pops to the top with a Republican president and the blue line takes the top position during a Democratic president.  During the Bush years (2000-2008), Republican voters felt the economy was better than Democrats did by a significant margin despite the market objectively declining by a rate of 4.5% annually during that period.  During the Obama years, the market returned 16.3% on average annually, but Republican voters again FELT that things were worse than Democrats and so on.  We’re all so fickle, but I believe there are objective facts about the world that we can know and understand and it’s important to be thoughtful about the data when making investment decisions. 

While we are all riding the rollercoaster together, our rose(or blue)-tinted glasses can color our perceptions in ways that make it hard to be objective investors.  

Where are we now?

At the time of writing (2/7/24), the economy is objectively in pretty good shape.  This is not to say everyone has the job they want or deserve, nor that everyone has the income that they would like to have.  However, we are broadly experiencing wage growth at a faster pace than inflation is rising and that, for the moment, should allow the economy to push forward. 

The Federal Reserve continues to thread the proverbial needle, balancing the need to stabilize price inflation while avoiding mass layoffs. The market, for its part, seems to have gotten a little ahead of itself at the end of 2023 in its belief that we would see rate cuts during the first quarter of 2024.  We cannot forget that over the last few years, the Fed has been very clear in their intention; I believe we should continue to take them at their word.  The potential for inflation to accelerate again, given the relative stability of our current economic situation, is the greater overall risk within the context of these low unemployment numbers.  The Fed would not likely want to risk letting the cat back out of the bag when all but its tail remains to be stuffed back in.

Finally, the Fed is also intimately aware that it is an election year!  They do not want to be seen as having undue influence over the election by seemingly creating improved conditions for the economy by reducing rates prematurely.

To sum up, there are always global risks that make being an investor challenging at times, but the reason that you want to be an investor is because you believe that companies in the United States and around the world will continue to find ways of being profitable and returning value to their shareholders in the form of dividends and appreciation in their stock price.  Companies will continue to hire attorneys and accountants to assist them in navigating ever-changing tax codes, legislative landscapes, and geopolitical disagreements.  Yes, policy can influence opportunities over short periods, but if you’re a long-term investor, just remember data is important and four years is not a long time.

We look forward to our client discussions throughout 2024!