US Elections 2024: How it might impact portfolios

How do Stocks and Bonds Behave Before and After Elections?

Stock and bond market leadership has often been defensive in the six months before elections and cyclical in the six months after them (FIGURE 1). In 2024, defensive stock market sectors have outperformed cyclical ones since July 10, and Baa credit spreads in the bond market have widened slightly since late May.

Figure 1: Cyclical versus Defensive Positioning in Stocks and Bonds Around Elections

Source: Haver Analytics, FactSet, and Bloomberg as of August 26, 2024. Note within the S&P 500, Defensive sectors include Consumer Staples, Health Care, Communication Services and Utilities; Cyclical sectors include Consumer Discretionary, Energy, Financials, Real Estate, Industrials, Information Technology and Materials. US Treasuries are measured by Bloomberg US Aggregate Government – Treasury Index, Investment Grade by Bloomberg US Corporate Investment Grade Index, and High Yield by Bloomberg US High Yield – Corporate Index. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. 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. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.

How the Election May Impact Stock Sectors

A second Trump presidency could mean lower taxes, higher tariffs, a more American-first agenda, and less regulation than a first Harris term. Corporate tax reductions were made permanent in the 2017 Tax Cuts and Jobs Act (TCJA) but the marginal tax rates on individuals, the exemption for estate taxes, and the amount individuals can deduct for state and local taxes have sunset provisions that start in 2025. Making the sunset provisions permanent could cost over $3.5 trillion according to the Congressional Budget Office (CBO) and the Joint Committee on Taxation¹. Lower personal taxes should be beneficial for much of the Consumer Discretionary sector, but to the degree that adding to the nation’s $35 trillion in debt leads to higher interest rates, it could also weigh on sectors investors often turn to as bond proxies for income generation (FIGURE 2). Residential real estate in high tax areas would likely benefit from a reversal in the $10,000 state and local tax (SALT) limit while a drop in the standard deduction would be felt more by those with lower itemized deductions. This could lead to geographical dispersion in discretionary income and spending.

Figure 2: Sector Preferences and Rationale

Source: Citi Global Wealth as of September 10, 2024. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. Past performance is no guarantee of future results. Real results may vary. Citi does not offer advice on Taxation issues. Please consult an independent tax advisor before making any investment decisions.

Higher interest rates could also raise the cost structure of renewable energy projects and some consumer purchases that require financing. That said, inflation has come down, the Fed is about to start lowering interest rates, and 30- year mortgage rates probably peaked in October 2023, in our view.

Renewed trade tensions could speed up onshoring and domestic manufacturing, but it could also undermine demand for transportation fuels through reduced container traffic into ports and shorter trucking routes intermodally. Former President Trump has been vocal on the campaign trail about bringing a resolution to the Ukraine-Russia conflict. If a resolution did take place, it could lead to lower oil and gas prices through reduced trade frictions and distortions.

Domestically, a second Trump administration would likely be supportive of the fossil fuel industry, energy independence and transitioning to electric vehicles at a slower pace. However, it could take years to build out new oil and gas pipelines and LNG infrastructure. Policy uncertainty on renewable energy investments would likely rise but Republicans may not be too eager to reverse a push towards green factories and mining as more than 75% of the money flowing from these Biden era initiatives has been into GOP leaning districts².

A lighter regulatory touch in a second Trump term could help restore the climate for deal-making and M&A activity.

No matter who wins in November, US defense contractors should benefit from the depletion of hardware and munitions resulting from NATO’s support for Ukraine and renewed efforts by European nations to build their defenses. A second Trump administration may apply more pressure on US allies to boost and maintain their readiness while the Biden-Harris administration has shown more willingness to support Ukraine in recent budget negotiations.

Major healthcare legislation is not likely to happen with either candidate, given budget constraints and the recency of past initiatives. Medical equipment / life science tools are largely removed from election risk, in our view. The Inflation Reduction Act (IRA) allows for a growing number of drug prices to be negotiated and a Harris administration may be more aggressive in doing so. Meanwhile, healthcare services are largely a domestic industry that should have little exposure to potentially higher tariffs under a second Trump administration. Outside of the pharmaceutical industry, healthcare stocks have tended to perform well in election years.

S&P 500 Stock Market Returns if the Incumbent Party Wins or Loses

A positive start to the year for US equities has been more consistent with the incumbent party candidate winning in November but the stock market has produced positive actual returns during both the Trump and Biden administrations (FIGURES 3-4). In all, the S&P 500 has risen in 13 of the past 15 election years. One of the great lessons on investing is to stay invested, endure the ups and downs, and let returns compound over time.

Figure 3: Presidential Year Stock Market Returns using S&P 500 since 1952

Figure 4: S&P 500 Stock Market Returns Under Trump and Biden have Been Positive

Source: Haver Analytics as of May 6, 2024. Period used for S&P 500 return under Trump was 1/20/2017-1/20/2021, under Biden 1/20/2021-5/06/2024. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. 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. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.

Parting observations

The S&P 500 has risen in 13 of the past 15 election years. It has also posted positive returns during both the Trump and Biden-Harris administrations.

 The final year of a Presidential term has been the second best overall, on average, within the four-year Presidential cycle for the stock market since 1900 (Figure 5). It’s been the best with a Republican in the White House, the second-best following either an incumbent win or loss, and the third-best with a Democrat in the White House.

Figure 5: S&P 500 Performance During Presidential Cycles, by Party since 1900

Source: Haver Analytics as of December 13, 2023. All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events. 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. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.

That said, we think the outlook for the economy, profits, interest rates, and valuation levels are the more important performance drivers. We continue to expect inflation to fall, the Fed to cut rates, and stock market leadership to fan out on profits that are both rising and broadening by sector and geography.

References

1. Crandall-Hollick, M., McDermott, B., Marples, D., “Reference Table: Expiring Provisions in the “Tax Cuts and Jobs Act” (TCJA, P.L. 115-97)”, November 21, 2023, https://crsreports.congress.gov/product/pdf/R/R47846
2. Hiller, J., Mollica, A., “Biden’s Green Factory Push Is Benefiting Republican States.” Wall Street Journal. February 27, 2024. https://www.wsj.com/politics/policy/bidens-green-factory-push-is-benefiting-republican-states- 1e6e69c4?mod=latest_headlines