With the election drawing near, the airwaves are filled with promises and predictions. Each side claims their policies will boost growth and stabilize markets, while opponents warn of economic disasters if the other party wins. But do presidents really have that much control over the economy and stock markets? And more importantly, should you tweak your investment strategy based on who wins?

While elections matter—particularly with tax changes expected in 2025—the reality is more complicated. Markets respond to many forces, and history suggests that no president, no matter how ambitious their policies, can completely control economic outcomes. What really drives long-term market performance is the ebb and flow of the business cycle—a natural pattern of economic expansion and contraction. Betting too heavily on political outcomes could actually do more harm than good to your portfolio.
 

Business Cycles, Not Politics, Drive Market Performance

The economy, like the weather, follows natural patterns that are difficult to predict or control. Economists call these patterns business cycles, and they’re made up of periods of growth (expansions) followed by slowdowns or recessions (contractions). Presidents who take office during a recovery tend to enjoy stronger economic growth, while those who enter late in the cycle often face turbulence.

One way to measure where we are in the cycle is through the output gap—the difference between what the economy is currently producing and what it could produce if it were running at full capacity. When the gap is negative, there’s room for growth, and markets tend to respond favorably. But when the gap is positive—indicating an overheated economy—growth tends to slow, inflation rises, and recessions become more likely.

Here’s the bottom line: Presidents benefit (or suffer) from the timing of the economic cycle more than from their policies. Whether Democrat or Republican, a president who takes office in the early part of a recovery often sees strong stock market performance. On the other hand, those who inherit a booming but overheated economy typically encounter more challenges.

Early vs. Late-Cycle Presidencies: A Tale of Two Outcomes

The numbers back this up. Presidents taking office in the early phase of the cycle—when unemployment is high and inflation is low—have historically enjoyed an average annual stock market return of 14%. In contrast, late-cycle presidencies, with higher inflation and low unemployment, have seen more modest market growth, averaging 6.3% annually.

Take Ronald Reagan, for example. When he took office in 1981, the U.S. was grappling with high inflation and unemployment. But as inflation eased, markets surged, giving Reagan credit for an economic turnaround. Contrast this with George W. Bush, who inherited a late-cycle economy in 2001. His presidency was marked by recessions and market declines, despite efforts to stimulate growth.

What Does the Current Business Cycle Tell Us?

Looking at today’s data, the economy is showing signs of being in a late-cycle phase. The output gap is slightly positive, unemployment is at 4.2%, and inflation—though easing from its post-COVID peak—remains elevated. Meanwhile, stock valuations are at an inflation-adjusted price-to-earnings ratio of 32.8, one of the highest levels in decades.

These conditions suggest that whoever wins the 2024 election may face challenges keeping the economy on track. Historically, when a new president takes office during a late-cycle phase, the odds of a recession increase. In fact, five out of the last seven late-cycle presidencies saw a recession within their first term.

That said, economic cycles don’t always follow predictable timelines. A recession isn’t guaranteed, but the next administration will likely need to navigate slower growth and manage inflation carefully—whether through fiscal policy, tax reforms, or other measures.

Policy Matters, But Not as Much as You Might Think

This isn’t to say that policies are irrelevant. Presidents can still influence specific sectors of the economy. For example, despite former President Trump’s efforts to expand domestic energy production, the energy sector underperformed during his term. In contrast, energy stocks soared under President Biden, even though his administration focused on reducing reliance on fossil fuels.

These seemingly contradictory outcomes reflect the broader forces at play. Global trends, market sentiment, and unforeseen events often carry more weight than individual policies. The COVID-19 pandemic, for instance, disrupted both Trump and Biden’s terms in ways no one could have predicted.

Resist the Urge to Time the Market Based on Politics

Every election season stirs emotions, but making investment decisions based on political outcomes is risky. History shows that the stock market has delivered strong returns—an average of 11.4% annually—regardless of which party holds the White House. Investors who try to time the market around elections often miss out on gains, harming their long-term returns.

The smarter strategy? Stick to a diversified, long-term plan that aligns with your financial goals. Elections can create short-term market volatility, but markets tend to recover and move higher over time. If you have a solid financial plan in place, there’s no need to overhaul your portfolio every four years.

Looking Beyond the Headlines

While it’s natural to feel anxious about the outcome of an election, it’s important to keep things in perspective. Markets may experience some turbulence in the weeks following the vote—especially if the results are contested—but they’ve always found a way to adapt. A single election is unlikely to change the long-term direction of the economy.

Remember, your financial plan should be built to withstand the ups and downs of multiple market cycles—not just the latest election. Stay focused on your long-term goals, and avoid letting political headlines drive your investment decisions.

Final Thoughts: Stay the Course

Voting is an important civic duty, and we encourage you to make your voice heard in November. But when it comes to managing your money, resist the temptation to let political events sway your strategy. The best way to build wealth over time is by staying invested, managing risk, and sticking to your long-term plan—regardless of which party is in power.

At the end of the day, markets are resilient. They’ve survived wars, recessions, political upheaval, and pandemics. And they’ll survive this election, too.

Let us help you navigate these uncertain times and keep your financial plan on track. Together, we’ll make sure your investment strategy stays focused on what really matters: growing your wealth over the long haul.

If you've found value in these insights, I invite you to dive deeper into the world of business growth by subscribing to the Candy Valentino Show on Apple Podcast.

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