As fall approaches, the nation finds itself facing yet another contentious presidential election. When uncertainty rears its head – whether due to unexpected corporate earnings reports, black swan events like 9/11 or a presidential election – volatility frequently follows. And markets loathe uncertainty.
Humans are also inherently averse to uncertainty, and the 2024 presidential election is amplifying this sentiment in spades. As the nation anticipated a rematch of the 2020 election, the incumbent’s unexpected decision to cede his bid to the vice president has left many wondering what comes next. This increased uncertainty has generated anxiety, particularly among clients who are already prone to being skittish.
This growing unease is not unusual. One survey, conducted by The Harris Poll on behalf of the American Psychological Association ahead of the previous election, found that 68% of U.S. adults considered it a significant source of stress – a substantial increase from 2016 when 52% experienced similar feelings. As the U.S. heads into what will undoubtedly be a rocky election cycle, advisors must be prepared to support concerned clients. Here are some ideas to lean into during these conversations.
Let History Be Your Guide
One of the most effective ways to alleviate client concerns is to advise them about historical election cycles. Since 1928, the S&P 500 has averaged an annual return of 11.58% during presidential election years, compared to a 9.9% annual return since the index’s inception. While these figures may offer some reassurance, it is essential to remind clients of the well-known adage that past performance does not guarantee future returns.
There have only been 24 presidential elections since 1928, which provides a relatively limited sample size. Nevertheless, despite the stress that elections can cause voters, markets generally respond positively during election years. This historical perspective can be a powerful tool in helping clients maintain their composure and keep their long-term goals in focus.
Policy Over Party
While financial markets are non-partisan, there are down-ballot items that advisors should monitor closely and discuss with clients, depending on which party wins the election. Ultimately, it’s policy, not party affiliation, that matters most. For instance, the 2017 Tax Cuts and Jobs Act (TCJA) is scheduled to sunset at the end of 2025 unless Congress takes action to extend its benefits.
If the TCJA expires, there could be significant ramifications. These include potential tax rate increases for up to 60% of tax filers, a reversion of the estate and gift tax exemption amounts to pre-2017 levels and an increase in the top corporate tax rate from 21 percent to 35 percent.
A financial cold war with China may be brewing.
Another policy example worth monitoring is the stance of both parties regarding China. Despite their many differences, both Democrats and Republicans are somewhat aligned in their high-level policies – including the desire to domesticate the manufacturing of items critical to national security and taking a firm stance on tariffs. This alignment suggests that while the rhetoric may vary, the policies themselves could have a significant impact on markets. Advisors should keep a close eye on these developments, as a financial cold war with China may be brewing, paving the way for more market volatility.
The Bottom Line
Ultimately, the fundamentals underlying the markets and the economy will dictate the direction of stocks, not the political party that occupies the White House. Factors such as the Federal Reserve’s ability to manage inflation, the strength of the labor market and consumer confidence, and the overall health of corporate earnings will determine how investors fare. It is crucial to emphasize to clients that elections are just one of many factors that influence market performance.
Perhaps most importantly, remind clients that their financial plan was forged to support their unique goals. The short-term news cycle and media noise will not have a lasting impact on their wealth in the long run. Encourage clients to take breaks from the news, particularly social media, which can fuel anxiety and lead to impulsive financial decisions that could be more harmful than the result of any election.
Markets Are Resilient
Presidential elections tend to raise anxiety levels, making it imperative for advisors to reassure clients that their financial plans are based upon their unique goals and are built to transcend short-term political cycles. Longer term, due to the importance of down-ballot issues like the potential sunsetting of the TCJA at the end of 2025, advisors should revisit plans to address any impacts of expiring legislation.
At the end of the day, market fundamentals will determine the direction of clients’ investments.
Encourage clients to view the election as just one of a multitude of factors influencing the market, while reminding them that historically, markets have shown great resilience, regardless of which party occupies the White House. Stress the importance of maintaining the proper perspective, ignoring any media noise concerning the candidates and avoiding rash, emotional decisions based on the latest news – because, at the end of the day, market fundamentals will determine the direction of clients’ investments.
JJ Feldman, Partner and Co-Head of Wealth Management at Helium Advisors, an SEC-registered investment advisor and integrated wealth management firm.
