On Tuesday, November 5, 2024, the United States will define who its president will be for the next four years. Elections are historically when investors look adapt your strategies in a new context, which is why it is interesting to analyze the historical behavior of the markets in relation to this type of event.
Taking the S&P 500 index as a reference, which groups together the main 500 large capitalization companies on the American market, we can see that In election years the average growth of this index is 7%. A moderate figure if compared to the historical average of non-election years, which is around 11%, and even more so if we take the average of the last year before the elections, which reaches 17%.
However, these averages show a very wide distribution, so we must be careful when analyzing them. For example, the historical average of the S&P 500 in election years is 7%, but it saw a peak decline in 2008 of -37% during the subprime mortgage crisis, and a peak increase of 23% in 1996.
However, this does not necessarily mean that it is convenient be out of business during election years. Investors who decided to implement a “wait and see” strategy, remaining in cash or with liquid options, performed better in 16 of the last 22 election periods.
Another pattern that can be seen in US election years is the improved performance of small- and mid-cap stocks. For example, the index Russell 2000, which brings together American “SMEs”, has averaged an election-year return of 14%, outperforming the S&P 500 in 8 of the last 10 election periods. Rotating part of one index relative to the other can be useful in a diversification strategy.
Today, February 2024, the consensus of Wall Street analysts holds that the S&P 500 index will reach the level 5,280 points, thus representing an increase 6.5% in line with historical performances during electoral periods. However, there is also a consensus among analysts that the companies that make up this index belong to the sector Oil & Gas can achieve a performance of 18%.
Analyzing in more detail the behavior of the S&P 500 index during the election year, a marked volatility is observed, which is usually transitory and reduces as the elections approach in November, obtaining a positive momentum the day after the elections when any type of uncertainty is eliminated.
This volatility is usually associated with various prejudices regarding sectors and industries that would theoretically benefit from the victory of one candidate or another. The political characteristics of the United States, with a strong two-party system and the almost zero probability that a third party with the possibility of victory will appear, make it easy to interpret What could be the winning and losing sectors?
This volatility should be interpreted as a strategic opportunity, following proposals from candidates that could generate price pressure on companies.
In summary, election years usually have their own particularities in terms of investments. But there are some patterns that you can take advantage of by investing in specific sectors and types of companies, interpreting volatility as an opportunity to find attractive entry prices.
Source: Clarin
