Election and the Stock Market

SG Wealth Managers · Article One Election and the Stock Market

Introduction:

Welcome to the first in the special series of educational pieces by SG Wealth Managers leading up to the 2025 Presidential Inauguration. In this six-part series, we will be diving deeper into the dynamics of market and economic trends during this extraordinary period of political transition. Understanding how elections and policy changes affect the stock market can help investors and financial planners put things into perspective. Today, we start with a look at the relationship between elections and market movements but also remind you of how important it is to keep a sound, long-term investment strategy in place.

The Intersection of Elections and Market Volatility

Elections and the stock market have always moved in a very closely related, yet complex, way. Historically, markets have become more volatile during election years due to speculation by investors over possible policy shifts. The 2024 election was no different. Immediately after, the market surged 3.7% in just six days, reflecting optimism about expected pro-business policies. But as of January 14, 2025, the market has retreated 3.8% since mid-December, showing the retracement spurred on by uncertainty.

This no doubt requires an understanding of the investors’ psychology and the way markets react to certain news. Election results bring in optimism and one reason to get concerned, hence giving rise to quick, sometime short-term volatility. It’s very important that as investors, they avoid making decisions based on temporary fluctuations. Rather, it’s important to stick to the fundamental principles of long-term investing.

A Historical Perspective: Election Year Trends

The U.S. stock market has always shown a tradition of reacting to presidential elections.

We can try to analyze the trends of the past for insight into current and future patterns:

The 2016 Election: After Donald Trump’s unexpected win in 2016, there was a significant rally often referred to as the “Trump Bump.” Investors anticipated corporate tax cuts, deregulation, and infrastructure spending. This optimism led to a surge in equities, particularly in financials, industrials, and energy sectors. The S&P 500 surged over 9% in the two months that followed.
The 2020 Election: In 2020, markets responded differently. While the uncertainty heightened by COVID-19 initially increased market volatility, the market later stabilized and rallied by year-end due to rising expectations of fiscal stimulus under the Biden administration.
The 2024 Election: The latest election took a similar trajectory. Initial euphoria from expected policy reforms led to a rapid rally. Subsequent retracement reflected investors reassessing the probable implications of proposed policies by the administration. This is a reminder that markets are fundamentally unpredictable.

The Essentials of Long-Term Investment

While elections may sometimes cause short-term market movements, they should not derail a sound investment strategy. Key principles to discuss this year include:

Core Stock Holdings: Companies offering essential goods or services, such as those in healthcare, utilities, and consumer staples, often perform well over successive market cycles. These “core” stocks provide stability in a diversified portfolio.
Dividends as a Buffer: Dividend-paying stocks offer a steady income stream, buffering against market volatility. Reinvested dividends have historically accounted for a substantial part of total returns, offering stability during uncertain times.
Avoiding Emotional Decisions: Emotional reactions to market fluctuations often lead to poor outcomes. History shows that maintaining a long-term view typically yields better results than trying to time the market.

Exploring Data: Recent Market Movements

The 2024 election led to a 3.7% market gain within six days due to optimism over policy changes. However, a subsequent 3.8% decline from December 16, 2024, to January 14, 2025, provides additional context. Several factors influenced this retracement:

Policy Uncertainty: Investors await clarity on key issues like taxation, trade, and regulation, tempering initial optimism.
Economic Conditions: Slow economic growth and high interest rates have added to market anxiety, emphasizing the need for strategic alignment with broader trends.
Sector-Specific Impacts: Sectors like technology and financials have experienced heightened volatility as investors reassess growth prospects under the new administration.

Lessons for Investors:
The interplay between elections and markets highlights the need for discipline in investing. Key takeaways include:

Diversification is Key: Spread investments across asset classes and sectors to reduce risk.
Focus on Fundamentals: Companies with strong balance sheets and competitive advantages are better equipped to weather volatility.
Consult Your Advisor: Regularly review your portfolio to ensure alignment with goals and risk tolerance.

Preparing for What's Next

As we move further into 2025, the implications of the new administration’s policies will become clearer. Tomorrow’s article will examine interest rates, particularly the tension between President Trump’s preference for lower rates and Federal Reserve Chairman Jerome Powell’s stance. We’ll also discuss potential impacts on tech stocks and bonds.

Conclusion:

While elections inevitably influence markets, adhering to sound investment principles ensures resilience. SG Wealth Managers is here to guide you through these times. If you have questions about your portfolio or wish to discuss how market trends impact your financial plan, don’t hesitate to reach out. Together, we’ll keep your strategy on track to achieve your goals.

Stay tuned for tomorrow’s article on interest rates and their implications for investors. We’re here every step of the way!

Disclosure: This is an informational article and should not be taken as financial advice. Always contact your financial advisor to understand how these trends may affect your specific situation. SG Wealth Managers does not take any political sides, and as such, will not make any commentary that is political in nature; rather, this is strictly an economic and financial discussion. Neither the information nor any opinion expressed comprises a solicitation for the purchase or sale of any security. This content is directed exclusively for the purpose of general education.

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Written by:

Eric Gomez

I am the CEO of SG Wealth Managers, a registered investment advisory firm. One of my favorite things to do is learn something new every week, whether about investing or another subject.