Morgan Stanley
2024 Elections

Election 2024: What Do the Markets Say?

Oct 17, 2024

Certain economic indicators and stock market trends have historically forecasted which U.S. presidential candidate is likely to prevail. Here’s what investors should know.

Author
Monica Guerra, Head of Policy, Morgan Stanley Wealth Management
Author
Daniel Kohen, U.S. Policy Strategist, Morgan Stanley Wealth Management

Key Takeaways

  • Conflicting economic and market indicators underscore that the election is likely to be decided on the margin, with commonly cited data points not reaching a consensus view in favor of one party over another.
  • Election years tend to bring cross-asset market volatility, and 2024 may be particularly volatile, given the potential for delayed election results as well as macroeconomic and geopolitical concerns.
  • Investors should remember that the business cycle is likely more relevant to market performance than electoral outcomes.
  • Economic and market indicators may provide insight into current sentiment but are not predictive of actual outcomes. 

The 2024 U.S. presidential election is now just days away and will be highly consequential for investors. The next president will play an important role in developing tax policy, influencing trade and the use of tariffs, addressing U.S. government debt and deficits, and navigating geopolitical unrest.

With polls continuing to show Vice President Harris and former President Trump locked in a tight contest, investors may consider looking to economic indicators and stock-market trends for insight into potential election outcomes. Here’s what to know in the lead-up to Election Day.

High Prices and Rates May Sway Voters

In this close election, candidate prospects are a true toss-up. My team’s October 15, 2024, analysis found conflicting economic and market indicators, further clouding the reading of potential outcomes.

 

While not the only determinant, voter sentiment on the economy is correlated with presidential outcomes. For example, according to the Center for the Study of Democratic Institutions, a 5% increase in GDP results in a corresponding 6% gain in incumbent vote share. However, in 2023 and 2024, we have seen a notable disconnect: Though Harris’ approval rating has increased since she entered the national spotlight, annualized GDP growth of 2.8% in 2024’s second quarter corresponded with a net-zero change in Biden’s approval rating.

 

This disconnect may be due to voters’ perceived wealth, amid still-high prices and interest rates. A recent Morgan Stanley Research survey shows inflation, jobs and the economy are the top concern for 63% of consumers, even as inflation cools. In addition to the pinch of higher prices, interest rates will likely remain high by historical standards, even as the Federal Reserve cuts its policy rate. This has made the handling of the economy a key issue in this election and a focal point for the Harris campaign.

Consumer Moods Remain Dim

The University of Michigan Consumer Sentiment Index fell to 68.9 on a preliminary basis in October, from 70.1 in September, mainly driven by a 5.2-point drop in sentiment among Republicans. The index remains well below its historical election-year average of 85.7, indicating that consumers’ struggles are ongoing. In fact, going back to 1978, sentiment has never been this low in October of an election year, and the only two election cycles where it hovered near these levels resulted in party changes. All that said, sentiment is just one of many indicators of election results and should be viewed in the context of overall economic conditions.

Stock Returns May Reflect Political Shifts

Looking at broad market performance, in the past 20 of 24 general election cycles dating back to 1928, when market performance was positive in the three months prior to Election Day the incumbent candidate won. The S&P 500 Index has performed positively month-over-month since April 2024, which suggests a potential tailwind for the Harris campaign.

 

The performance of different equity sectors can also offer insight into potential political outcomes, as investors position their portfolios for gains or losses ahead of anticipated policy changes that may affect an industry’s profitability.

 

Knowing this, my team created two equity baskets, each containing 12 sector and industry exchange-traded funds that could benefit from a Democratic or Republican win. Year-to-date, as of October 15, the Republican basket (which includes sectors such as Energy, Materials, Utilities and Real Estate) had outperformed the Democratic basket (including solar energy, tech and infrastructure stocks) by about 10%— down slightly from a more than 11% margin in mid-September and in line with tightening polling and prediction odds. That said, momentum shifts in the closing weeks of the campaign could create risks for stocks favored in the event of a GOP victory.

 

Looking more closely at specific industries and sectors, we find:

 

  • Defense industry stocks, relative to the broader market, have closely tracked the Democratic odds of election victory in 2024, which appears to run counter to a traditional assumption that Republican administrations are more favorable for defense sentiment. We maintain a positive long-term view on defense regardless of who occupies the White House, as current geopolitical tensions continue to drive robust bipartisan spending and national security prioritization.

 

  • On the other hand, technology sector stocks, relative to the broader market, have closely tracked the odds of a Republican presidential victory in 2024. While artificial intelligence and tech development and regulation remain bipartisan priorities, Trump may be seen as the deregulation candidate, a potential plus for the industry.

 

Importantly, investors should keep in mind that while these indicators may offer insight into sentiment at a given point in time, they are not predictive of actual outcomes, nor should they be viewed as an endorsement of any political party. Also, while political outcomes and corresponding policy shifts may impact company profitability, the business and economic cycle are likely to be more relevant to market performance.

Delayed Results May Stoke Volatility

The potential for a delayed or contested election result depends on two primary factors:

 

  • The speed of counting mail-in ballots in different states: Twenty-three states will only begin counting ballots on Election Day, while 15 others will begin after polls close on Election Day.  
 
  • The tightness of the race: Thin margins in states critical to clinching the electoral college vote could trigger delays or even legal contests, while a wide margin would better secure the candidate’s position. Given tight polling margins in swing states, our base case is that an election delay could last days or even weeks.

 

This matters for investors, because delayed election results introduce a period of uncertainty and speculation, which historically has resulted in elevated levels of short-term market volatility. For example, the 2020 election saw a 40% spike in the CBOE Volatility Index (VIX), known as the stock market’s “fear gauge,” that lasted for three days post-election until a winner was officially declared.

Investing in an Election Year

We expect a contentious final sprint to Election Day as campaigning accelerates, proposals sharpen and competition increases for swing-state voters. An unexpected political event or revelation, known as an “October surprise,” could marginally sway the election in either direction, and mail-in voting and staggered ballot counting, as well as the sheer tightness of the race, could leave the election result undetermined for some time and drive heightened market volatility. Investors should keep their long-term objectives in mind during such periods and consult their Morgan Stanley Financial Advisor on how to handle election-related volatility.

 

Connect with your Morgan Stanley Financial Advisor to understand the election’s potential implications for your portfolio. To learn more, ask your advisor for a copy of the latest US Policy Pulse: 2024 General Election Series report from Morgan Stanley’s Global Investment Office. 

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Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following:

https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on an exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock and bond prices. Investing in an international ETF also involves certain risks and considerations not typically associated with investing in an ETF that invests in the securities of U.S. issues, such as political, currency, economic and market risks. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. ETFs investing in physical commodities and commodity or currency futures have special tax considerations. Physical commodities may be treated as collectibles subject to a maximum 28% long-term capital gains rates, while futures are marked-to-market and may be subject to a blended 60% long- and 40% short-term capital gains tax rate. Rolling futures positions may create taxable events. For specifics and a greater explanation of possible risks with ETFs¸ along with the ETF’s investment objectives, charges and expenses, please consult a copy of the ETF’s prospectus.  Investing in sectors may be more volatile than diversifying across many industries. The investment return and principal value of ETF investments will fluctuate, so an investor’s ETF shares (Creation Units), if or when sold, may be worth more or less than the original cost.  ETFs are redeemable only in Creation Unit size through an Authorized Participant and are not individually redeemable from an ETF.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk.

REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions.

Artificial intelligence (AI) is subject to limitations, and you should be aware that any output from an IA-supported tool or service made available by the Firm for your use is subject to such limitations, including but not limited to inaccuracy, incompleteness, or embedded bias.  You should always verify the results of any AI-generated output.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan Stanley Wealth Management retains the right to change representative indices at any time.

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