The Post-Election Market Landscape

Navigating today’s financial landscape involves understanding a range of influences, from election cycles and policy shifts to market sentiment and economic fundamentals. Recent events―including the 2024 election and Federal Reserve interest rate decisions―have highlighted some of the dynamics that shape market behavior and underscored the importance of maintaining a disciplined, long-term perspective in investing. At Coldstream, we avoid wading into partisan politics, so consider this post-election-related outlook more of a summary of what history has illustrated in terms of how markets behave in and around election cycles. In our view, long-term investors are best served by ignoring the short-term noise and focusing on their financial goals.

RESILIENCE ACROSS POLITICAL CYCLES

One reassuring aspect of the stock market is its resilience, regardless of which political party occupies the White House. Over the long term, markets have delivered positive performance under both Democratic and Republican administrations. While each party brings unique policy priorities that can influence certain sectors, the broader market is primarily driven by economic fundamentals, corporate performance, and investor sentiment—all factors that generally outweigh specific election outcomes.

AVOIDING POLITICAL BIAS IN INVESTING

While it’s natural for individuals to lean toward a political party, political preference doesn’t tend to form a strong basis for investment decision-making. Investment choices based on who is in office can limit your portfolio’s long-term growth potential and introduce unnecessary risk. Markets are complex and driven by a multitude of factors that extend far beyond political leadership. Data shows that markets have performed well over time under both parties, demonstrating resilience and growth regardless of the political environment.

The following exhibit illustrates the vast difference between investing only when either the Democratic or Republican party is in office versus staying the course through changes in political leadership. A portfolio that begins with $10,000 at the beginning of 1950 would have grown to $445,000 if invested only during Democratic regimes (5.2% annualized return), while the same $10,000 would have grown to $75,000 if invested solely during Republican regimes (2.8% annualized return). A portfolio that stayed invested over the entire time period, on the other hand, would have grown to $3.5 million―a compelling demonstration of the power of long-term, uninterrupted investment.

Making major investment shifts based on a president’s party affiliation can often do more harm than good. Staying invested through all cycles remains the most prudent approach for long-term investors.

MARKET REACTION TO THE ELECTION

The day after a presidential election often brings movement in the markets, a reflection of initial investor reactions to the results. Historically, markets have responded with either a brief surge or dip as participants assess the anticipated impact of the new administration’s policies on the economy, taxes, and industries―or just exhale after a period of heightened uncertainty. Of the 18 presidential election years since 1952, nine of them saw the market turn positive on the first trading day following Election Day. The average you can see in the table below of -0.23% was heavily influenced by the 2008 and 2012 elections, during which the S&P 500 logged one-day returns of -5.3% and -2.4%, respectively.

The Wednesday following the 2024 election saw the S&P 500 post the strongest gain in the post-WWII era, generating a return of 2.5% while continuing to climb higher to close out the week. What history has shown us is that the post-election period has generally produced higher returns, with the S&P 500 positive during the roughly two-month period leading up to inauguration day for 11 of the last 18 elections.

MARKET RESPONSE: UNIFIED vs. DIVIDED GOVERNMENT

The structure of government following an election—whether one party controls both Congress and the White House (a “sweep”) or power remains divided—can influence market expectations and performance. Historically, markets tend to perform well under both scenarios, but the dynamics differ.

In a unified government, in which one party holds the executive and both chambers of Congress, there is often a quicker pathway for passing legislation. This can lead to bold policy moves that impact specific sectors, such as healthcare, financials, energy, or infrastructure. While a sweep can bring initial market uncertainty as investors anticipate these changes, it may also fuel optimism around new government spending or regulatory adjustments, which can stimulate certain areas of the market.

In contrast, a divided government typically results in slower legislative change due to the need for bipartisan cooperation. Markets tend to view this as a stabilizing factor, anticipating fewer policy shifts that could disrupt the status quo for businesses. As a result, divided governments have often coincided with steady market growth, as investors can plan around a predictable regulatory environment.

Regardless of the election outcome, history shows that markets can thrive under both types of governance. Our focus remains on navigating these environments to keep your investments aligned with your long-term goals.

INTEREST RATE POLICY

One common investor concern is whether the Federal Reserve (the Fed) responds differently depending on which political party prevails in a presidential election.

The historical evidence should dispel any notion that recent rate cuts—or the possibility of further cuts—are politically motivated. Despite the scrutiny Fed members have faced in recent years, their transparency around policy moves has been clear and consistent, with the path of Fed rate cuts or hikes based solely on economic and not political factors.

Interestingly, while the Fed has begun to ease interest rate policy, the longer end of the yield curve (which the Fed does not control) has begun to climb, not fall. This movement actually started prior to the election as neither the candidates nor the political parties have placed much focus on limiting spending or improving the government debt outlook, and bond markets are now pricing in a higher potential for an inflationary resurgence.

STAYING THE COURSE

As we navigate the post-election period, it’s essential to remember that long-term investment success depends more on time in the market than on trying to time short-term market movements. Volatility is a natural part of investing and can often increase around major events like elections. This temporary uncertainty, however, is the “price of admission” for the returns that markets have historically delivered over time.

The market has a lot to digest in what will be a Republican-controlled White House and Congress. The size of the Republican majority will be key in determining potential changes in taxes, trade, tariffs, immigration, and ultimately to interest rates, inflation, and the ballooning government deficits and debt balance.

We believe in a steady, disciplined approach that aligns with your unique financial goals, and we’re here to support you in maintaining focus on the big picture. Markets can thrive under various government configurations, and diversification is an important tool to help balance portfolios against unknown risks as we experience changes in leadership. Staying invested, even through periods of volatility, allows your portfolio the opportunity to recover and grow as markets stabilize. As always, we’re committed to guiding your strategy with a long-term perspective, making adjustments when needed, and ensuring that you’re well-positioned for the future.

Thank you for your trust in us, and please don’t hesitate to reach out with any questions or concerns.

*All of Coldstream’s staff shall attain the required licenses and designations necessary for his/her position. The CFA Institute owns the certification marks CFA^® and Chartered Financial Analyst^®. CAIA^® is a registered certification mark owned and administered by the Chartered Alternative Investment Analyst Association^® in the United States.