Disclaimer. We provide
impartial political commentary. We do not endorse any political party or
figure, focusing strictly on political events’ economic and market
consequences.
The bulk of 2024’s
electoral action will occur in Europe, with 19 countries voting. The head of state may change in 10 nations, and 11 may see
parliamentary shifts. The European Parliament elections, involving 27 EU member
states and affecting 447 million individuals, are especially noteworthy. According to polls, Eurosceptic parties could possibly
secure up to 40% of seats.
Undoubtedly, the most intriguing event in world politics will be
the November elections in the USA.
We should remember the elections in other regions, which might
also reshape the global balance of power.
Traditionally, investors are sceptical about the political
agenda, giving more weight to financial news, such as monetary policy
adjustments or major corporate activities. However,
understanding the political climate is crucial before diving into
election-period investments.
In the U.S., it’s once again
Trump vs Biden. As of March 18, 2024, the U.S. political scene is set for a rematch
between Donald Trump and Joe Biden, who have won their parties’ primaries. Thus, they will soon be officially nominated for the U.S.
presidency by their respective parties, mirroring the 2020 electoral
battle, promising an intense campaign period.
Early elections in the UK. While
initially scheduled for January 2025, the UK might experience an early
election. This follows Labour leader Keir Starmer’s challenge to Prime Minister
Rishi Sunak, urging an earlier vote to address national challenges. Starmer stressed that the population chooses between
‘continued decline with the Conservatives or national renewal with Labour.’
Prime Minister Rishi Sunak has agreed to a 2024 election, which is currently
planned for the second half of 2024.
Japan’s leadership vacuum. Japan is
contending with a scandal that has significantly dented Prime Minister Kishida
Fumio’s and Shinzo Abe’s faction’s authority and has led to the dismissal of
four cabinet ministers, precipitating a potential leadership crisis. Kishida’s faction is also on investigators’ radar, and
his popularity has fallen to 17%.
Kishida aims to regain public trust with promises to root out
corruption and foster economic growth. Should he fail and resign, a
contentious power struggle is likely to follow. Japan
will get a new administration with new political priorities and possibly a new
economic agenda.
Example: How elections affect
economy and investors
During the presidential election season, many investors fall
into the trap of believing that stocks have a better chance if their preferred
party or candidate wins. However, market data shows the opposite—in the long
run, financial markets rise regardless of the ruling party.
Let’s take the U.S. election as an example. What can a
Republican or Democrat president mean for financial markets?
U.S. market history illustrates that political leadership has little
correlation with market performance, as markets have generally thrived across
different presidential administrations. Let’s find out why.
● Good market dynamics,
regardless of the ruling party. The U.S. stock market
has delivered positive returns under most administrations, except for periods
ending in deep recession. Since its inception in 1957, the S&P
500 index has achieved an average annual return of approximately 10%,
regardless of whether Democrats or Republicans were in power. The U.S. economy also grew by about 3% annually.
● No radical economic changes
despite political shifts. The structure of the US
economy has remained unchanged for decades. Even periods of one-party rule did
not result in significant change. The passage rate of ‘substantial’ bills did
not increase while the same party controlled both the executive and legislative
branches.
● The executive branch is
subordinate to monetary policy. While the executive
branch plays a role in economic governance, it operates under a broader
framework of monetary policy, which can significantly influence the president’s
success. For example, Presidents Reagan and Clinton benefited from successive
drops in interest rates. Conversely, Presidents George H.W. Bush and George W.
Bush faced challenges due to Federal Reserve tightening policies, resulting in
an inverted yield curve and recession. Meanwhile, President Obama benefited
from predominantly favourable interest rates during his term, apart from a
short period in 2015-2016. In contrast, President Trump was the unfortunate
recipient of tightening policy during his first two years in office.
History shows that innovation and investment opportunities will
continue regardless of who wins the presidential election.
There may be many political changes in the coming year that
could make significant adjustments to the legislative and executive branches of
government. Nevertheless, it isn’t easy to see any correlation between the
political situation, the president’s popularity, the economy’s state and the
dynamics of the financial markets.
Investors should focus more on the global economic landscape and
central bank policies rather than politics. Timing the financial market is
generally tricky and risky. Basing such a decision on an election cycle is not
wise in most situations.
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