This year marks a huge election year… and not just for the U.S.
In the next 12 months, more than 50 countries around the world will head to the ballot box – marking an all-time record. Around 4 billion people will be affected by these various presidential, legislative, and local decisions.
Election cycles are all about change. So it makes sense to assume elections cause wild stock volatility…
After all, democracy breeds uncertainty. It can lead to surprise regime changes – and even civil conflict. And that may make 2024 feel like a dangerous time to invest…
However, history shows that the opposite is true. The data tells us that the biggest elections of all tend to be great news for stocks.
Let me explain…
When it comes to elections, it doesn’t get any bigger than the U.S. presidential campaign.
It’s a relentless flood of media coverage every four years. And in one week, the Iowa caucuses will kick off the campaign trail – starting the next cycle in earnest.
The last time Americans went to the ballot box was for the 2022 midterm election. But a few days before polls opened, the U.S. Department of Homeland Security, FBI, National Counterterrorism Center, and Capitol Police issued the following bulletin…
We assess some motivated by election-related grievances would likely view election-related infrastructure, personnel, and voters involved in the election process as attractive targets – including at publicly accessible locations like polling places, ballot drop-box locations, voter registration sites, campaign events, and political party offices.
Thankfully, no election-day violence came to pass. But this bulletin shows just how much risk an election can incur…
So, if you’re worried that election years pose a threat to your portfolio, I’d understand that logic. However, history shows that isn’t the case.
To prove this, I measured how stocks performed in every election year going back to 1928.
There have only been 24 elections since then. But stocks tend to hold up well in election years. Take a look…
Since 1928, stocks have returned about 6% a year. That’s no different in election years… But there’s a little more to this story than meets the eye.
First, stocks tend to underperform in the first three months of an election year. So if stocks fall through March, history suggests that’s a buying opportunity and not a sell signal.
Second, it’s worth noting that elections are reliably bullish. Stocks were positive in 20 of the past 24 election years… resulting in a strong win rate of 83%.
What’s more, stocks returned 20% in the average up year and fell just 17% in the average down year. So we have a strong risk-to-reward setup for election years, too.
Now, I’m not saying that the year ahead contains zero political risk. With so many elections taking place, it’s almost certain that we’ll see some chaotic results.
But overall, the stock market reacts well to elections. So it’s a good year to embrace the uncertainty, stay long, and hold on for the ride.
Good investing,
Sean Michael Cummings
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Source: Daily Wealth