Election 2024: What do the markets say?

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The race to the White House enters a critical final stretch as the major candidates, following a heated September debate, seek to further define themselves, stake out policy positions and appeal to swing voters.

With polls showing 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 weeks leading up to Election Day.

Our team’s recent analysis of several key economic indicators highlighted potential challenges for Democrats¹.

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, we have seen a disconnect between economic performance and voter support this year: GDP grew at a 2.8% annual rate in 2024’s second quarter¹, yet there was no change in Biden’s approval rating, indicating that mixed economic data may have caused a breakdown in this relationship.

The 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 cools¹. The pinch of higher prices, combined with interest rates that will likely remain high by historical standards, even after Federal Reserve rate cuts that started in September, may weigh on the Democratic nominee.

The University of Michigan Consumer Sentiment Index increased for a second straight month to 70.1 in September, from 67.9 in August¹. Still, the index remains well below its historical election-year average of 85.7, indicating that while sentiment is modestly improving, consumers’ struggles are ongoing¹. In fact, going back to 1978, sentiment has never been this low in September of an election, and the only two election cycles where it hovered near these levels resulted in party changes¹. All that said, sentiment is just one of many indicators of election results and should be viewed in the context of overall economic conditions.

Analyzing consumer sentiment by political party, we unsurprisingly see higher readings among Democratic voters and lower readings among Republican voters, which is consistent with history, reflecting higher sentiment from those in favor of the sitting party in the White House. Sentiment fell slightly among Republicans and independents from August to September but rose by 1.7 points among Democrats, due in part to continued Democratic voter enthusiasm around Harris entering the race¹. However, the index among independents remains closer to Republicans than that of Democrats overall.

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, we created two equity baskets, each containing 12 sector and industry exchange-traded funds that we think could benefit from a Democratic or Republican win.

• 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 10% year-to-date, as of late September—below the maximum spread of 12.3% in early September, though momentum shifts in the closing weeks of the campaign could create risks for stocks favored in the event of a GOP victory.

We also considered a Republican “short” equity basket, containing stocks that could perform poorly if the GOP candidate prevails.

• As of late September, it was down more than 21% year-to-date compared to a comparable Democratic “short” equity basket, indicating investors could already be hedging against a Republican win.

Investors should keep in mind, however, 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.

Exhibit 1: Election year sector returns in the run up to a Democrat or Republican victory

Note: Percents indicate sector performance or each election-year quarter or other period, ending on Dec. 31 of that election year.
Source: Bloomberg, Morgan Stanley Wealth Management Global Investment Office (GIO) as of Sept. 24, 2024.

Past performance is not indicative of future results. An investment cannot be made directly in a market index.

Of course, much can change between now and November. In the meantime, investors may want to watch for potential index-level gains—and possible turbulence—in the weeks ahead. On average, the S&P 500 has risen in election years, with the strongest gains occurring amid split control of Congress and the White House, as gridlock typically limits drastic policymaking. But market volatility also tends to rise in election years, and 2024 may be particularly volatile, given macroeconomic concerns, heightened geopolitical uncertainty and political polarization, among other factors.

Importantly, we remind investors that 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.

• Amid still-high prices and interest rates, below-average consumer sentiment could disadvantage the incumbent party.
• Equity-sector performance suggests—at least for now—that some investors may be positioning their portfolios for a GOP win.
• Investors should remember that the business cycle is likely more relevant to market performance than electoral outcomes.

The equity basket examples presented are hypothetical in nature and not intended to predict, project, or guarantee the performance of an actual investment or strategy. Charges, expenses, and taxes, which could be associated with an actual investment or strategy and which would lower returns, are not reflected. Individual investor results will vary.

Article Footnotes:

¹The source of this article, Morgan Stanley Wealth Management Global Investment Office (GIO), US Policy Pulse: 2024 General Election Series, by Monica Guerra, Global Investment Strategist, was originally published on August 28, 2024.

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