Voters representing around half of the world’s GDP go to the polls this year—what might that mean for the economy and investors?

On Saturday, some 20 million voters will likely get their say in Taiwan’s general and presidential elections. It is an apposite way to start 2024: one of the first elections in an unprecedented year of elections, in a hotspot of the current spike in geopolitical tussles, at the epicenter of the production of economically critical semiconductors.

There is little doubt that some of these coming elections will be consequential. But what, if anything, should investors make of all this politicking, campaigning and voting?

At the Global Level: Politics Matters More Today

Voters representing around half of the world’s GDP and half its adult population are likely going to the polls this year. When elections are that widespread, they are not all going to be in sleepy backwaters where nothing much is happening.

Bangladesh and Taiwan kick things off. The U.S., the U.K. and Egypt look likely to round off the year.

In between, we have elections in India, the world’s largest democracy, experiencing both strong growth and market performance; in Pakistan, India’s old antagonist; in South Africa, with its longtime ruling party undergoing a slow-burn crisis; and in Mexico, with its complex relationship to its neighbor to the north.

There will also be votes in Iran, which saw serious civil unrest in 2022 and 2023, and is now at the heart of renewed Middle Eastern tensions; in South Korea, perennial frontline of the “new-old” Cold War; and in the European Parliament, where right-wing populists look set to make big gains, potentially complicating policymaking from net zero and migration to budget-setting and Ukraine. Even Russia and Ukraine themselves are holding elections.

The list hints at one reason why elections may matter more for the economy and markets today than they did 20 or 30 years ago: We have moved from the unipolar moment of the 1990s into a more fractious multipolar era.

But in addition, substantial and once disinflationary forces—advancing technology, demographics, global trade and energy generation—are increasingly mainstream political flashpoints that may be turning inflationary. How far should we limit the power of big tech? How do we balance the economic needs of the old and the young? What level of protectionism and security do we need in our supply chains? How fast can we decarbonize our economies? It seems likely that, at least in the last three, the pressures remain inflationary.

Focus on the U.S.: Market Implications?

History suggests that prevailing market dynamics matter more than election outcomes for immediate market performance. Also, a cycle that only occurs every four years makes robust signals hard to see through the noise. But what can history tell you?

Taking the U.S. as an example, since the 1940s, the equity market has reacted most favorably to a Republican “clean sweep” of the presidency and Congress, but least favorably to a Republican president facing a divided legislature. Investors appear to prefer a Democrat rather than a Republican president to be paired with a divided or opposing Congress.

A more consistent observation is that U.S. equities do a little less well and below long-term trend, on average, during U.S. election years. Diversification and defensiveness has tended to pay off.

On the whole, investors don’t appear to mind who wins elections—but they dislike the uncertainty and are glad to get them out of the way. In particular, close, hard-to-call elections tend to be followed by strong performance as uncertainty is removed—a consideration that may be relevant later in the year.

Focus on the U.S.: Economic Implications?

Some have focused on the central bank reaction function, suggesting that the Federal Reserve may favor alignment to a particular party over inflation and economic concerns. The 1972 election is often cited as an example.

But both the 1980 and 1988 campaigns saw presidents bemoaning rate hikes. While some see issues in the recent dovish language from the Fed, the simpler explanation is that the central bank’s Statement of Economic Projections sees PCE inflation at around 2.0 – 2.5% by the end of 2024. At that level, maintaining the current fed funds rates would imply considerable tightening through real yields. As we have highlighted elsewhere, an inflation surprise remains a risk, and one that the Fed is likely to react to—election or not.

In terms of fiscal policy, legislation rarely happens overnight, even when there has been a clean sweep. Historically, on average, fiscal policy has loosened and been steered toward benefiting consumers during election years, but not as much as you might expect if you believe politicians try to “buy votes.”

In general, bigger, structural and cyclical economic forces are stronger than policy changes. Might this year be an exception?

It’s possible because, as mentioned already, important economic dynamics are now mainstream political flashpoints—and while both the main U.S. political parties are hawkish on trade and loath to cut spending, there are clear differences.

A Trump-led government’s tariffs and immigration policy could reignite inflation concerns. It would likely extend the previous Trump administration’s tax cuts, whereas taxes are more likely to rise under a Biden-led government. And the fate of the Inflation Reduction Act (IRA) would hang in the balance in a Republican clean sweep.

Focus on the U.S.: Sector-Specific Implications?

Rather than thinking about the economic or whole-market impact of the election, however, it has often been more productive to think in terms of sector effects. After all, relative performance within the market persists regardless of whether the whole market is going up or down.

In 2016, for example, investors that had been anticipating a Clinton victory flocked to small caps and financials after Trump’s election win, quickly pricing for a regulation-slashing, tax-cutting, free-spending, “America-first” administration.

We could see something similar this time around, with small caps poised for some catch-up, and regional banks and consumer finance likely to benefit should Republicans get a chance to cut regulation and reduce the current scrutiny of fees. Healthcare could benefit from a Republican victory for similar reasons, while technology might enjoy less antitrust attention, and traditional energy and commodities get a boost from a rollback of environmental rules.

In contrast, electric vehicles and other beneficiaries of the IRA might struggle under a new Trump administration—although it should be noted that a lot of IRA spending is directed at Republican or swing states. And in a switch from historical assumptions, the defense sector appears highly exposed to election risk and more likely to benefit from a Democratic win, which would imply more international engagement and ongoing support for Ukraine.

In short, history suggests most investors are likely to see little lasting election impact on their portfolios. Many of the wilder conspiracy theories about vote-buying and politicized central banks can likely be ignored. In our view it remains likely that the effects will be felt at the sector and country levels rather than on the economy or market as a whole. However, if issues remain uncertain as we run into the election, or indeed contested thereafter, be alert for the potential to rally when uncertainty is removed.

In Case You Missed It

  • China Purchasing Managers’ Manufacturing Index: +0.1 to 50.8 in December
  • U.S. ISM Manufacturing Index: +0.7 to 47.4 in December
  • JOLTS Job Openings: -62k to 8,790k in November
  • U.S. December Employment Report: Nonfarm payrolls increased 216,000 and the unemployment rate remained at 3.7%
  • U.S. ISM Services Index: -2.1 to 50.6 in December
  • Eurozone Consumer Price Index: +2.9% year-over-year (core CPI +3.4% year-over-year) in December

What to Watch For

  • Monday, January 8:
    • China Consumer Price Index
  • Thursday, January 11:
    • China Producer Price Index
    • U.S. Consumer Price Index
  • Friday, January 12:
    • U.S. Producer Price Index

    Investment Strategy Team