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Not only does the presidential race remain “up for grabs,” but the congressional races are hotly contested as well. This might matter more to the stock market. The current profile of Congress (as of September 12), shows the Republicans hold a slim 220 to 211 majority in the House of Representatives (House), with all seats on the ballot, and the Republicans hold an even slimmer 49 to 47 majority in the Senate (plus 4 Independents who all caucus with the Democrats), with 33 seats on the election ballot. Stock market history shows that how Congress is controlled impacts the market more than the winner of the Oval Office. A “split” Congress could remain split or go all red (Republican) or all blue (Democrat). The graph below tells the story since 1945.
First, note that the U.S. stock market (SP 500 index) has produced positive average annual gains with either Democrat or Republican leadership. The S&P 500 has performed better with a Democrat president, although the best returns have come when Republicans control both the House and Senate, regardless of which party holds the presidency.
As I noted in my last ERPE Excerpts September 12, stock market volatility has historically increased in Presidential Election years. This is in essence a function of highly uncertain outcomes and speculation. For example, leading up to the 2016 election, the SP 500 dropped nearly 6% between mid-August and November 4, the Friday before the election. From election eve, November 7, to March 1, 2017 the index surged over 15%. So far, 2024 election year volatility has not hit the market. Instead the bull run has climbed the wall of worry and investors have embraced every dip with an appetite to buy. Through yesterday the SP 500 is up 1.31% this month. It is on track to be the first positive September for the index in 5 years. Factors contributing to 2024 gains so far are likely solid economic growth, lower interest rates, and technology investment led by AI. It appears to me that election FUD (fear uncertainty & doubt) has not weighed on investment returns this year. Given the many surprises in the presidential race to this point, along with still highly uncertain outcomes ahead including the congressional contests, we wouldn't be at all surprised if the VIX (the market "fear index") was spiking. It, though, is not.
Perhaps the market is discounting a "split" Congress as we essentially have now. It is often said that Wall Street likes a divided government (more difficult to pass major legislative changes) and are fearful of one-party control. The graph above, though, indicates the SP 500 index has done well when one-party control has been in place for 33 of the 79 (42%) years.
While most attention is given to the major market index, proper perspective when evaluating the stock market requires sector analysis. The SP 500 index is comprised of 11 sectors (e.g., health care, technology, financial). Here are how the stock market sectors performed under the last two administrations. Below is the sector performance during the four years of the Trump Administration. The S&P rose +67.8% over the four-year period, led by Technology and Consumer Discretionary. Only those two sectors outperformed the overall index, and Energy was not only the worst performer, but declined -48.4%.
The graph below shows the S&P 500 sector performance during the 3.7-years (full term has months remaining) of the Biden Administration. The S&P 500 has increased +49.8% from 12/31/20 through 9/25/24, led by Energy, Technology, and Financials. Just three sectors beat the index, and no sectors declined.
Typically, Congress and the Federal Reserve can play a bigger role in directly shaping markets, compared to the president. Congress sets tax rates, passes spending bills, and writes laws regulating the economy. That said, there are some ways that the president can affect the economy and the market. The independent Federal Reserve can have a significant impact by raising (bearish) or lowering (bullish) interest rates. Presidents have very little impact on the stock market, but they still seem to get some credit when performance is good and more of the blame if markets are down. This year's Presidential Election outcome on Congress should be what matters most.
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