The race to the White House continues to heat up as the major candidates, still fresh off their nominating conventions, hit the campaign trail to unveil key policy details and drum up support from voters. With polls showing Vice President Harris and former President Trump locked in a tight contest, investors may consider looking to economic indicators and stock-market trends for insight into potential election outcomes. Here’s what to know heading into a critical stretch just over two months before Election Day.
High Prices and Rates May Sway Voters
My team’s August 28, 2024, analysis of several key economic indicators highlighted potential challenges for Democrats.
While not the only determinant, voter sentiment on the economy is correlated with presidential outcomes. For example, according to the Center for the Study of Democratic Institutions, a 5% increase in GDP results in a corresponding 6% gain in incumbent vote share. However, this dynamic has recently broken down for President Biden: GDP growth accelerated to a 2.8% annual rate in 2024’s second quarter, up from 1.3% in the first, yet Biden’s approval rating has dropped 1.4% this year.
The disconnect may be due to voters’ perceived wealth, amid still-high prices and interest rates. A recent Morgan Stanley Research survey shows inflation and the economy are the top concern for 61% of consumers, even as inflation cools. The pinch of higher prices, combined with interest rates that will likely remain high by historical standards, even after expected Federal Reserve rate cuts starting in September, may weigh on the Democratic nominee.
Consumer Moods Improve, But Remain Dim
The University of Michigan Consumer Sentiment Index increased for the first time since March to 67.8 on a preliminary basis in August, from 66.4 in July. Still, the index remained well below its historical election-year average of 85.7. In fact, going back to 1978, sentiment has only been this low in August of an election year twice, with one instance resulting in the incumbent’s unseating (1980) and the other in a party change in which there was no incumbent (2008). All that said, sentiment is just one of many indicators of election results and should be viewed in the context of overall economic conditions.
Analyzing consumer sentiment by political party, we unsurprisingly see higher readings among Democratic voters and lower readings among Republican voters, which is consistent with history, reflecting higher sentiment from those in favor of the sitting party in the White House. Sentiment fell slightly among Republicans from July to August but rose by 4.9 points among Democrats and 1.5 points among independents. The recent rise among these latter cohorts may be due in part to voter enthusiasm around Harris entering the race. However, the index among independents remains closer to Republicans than that of Democrats overall.
Stock Returns May Reflect Political Shifts
The performance of different equity sectors can also offer insight into potential political outcomes, as investors position their portfolios for gains or losses ahead of anticipated policy changes that may affect an industry’s profitability.
Knowing this, my team created two equity baskets, each containing 12 sector and industry exchange-traded funds that could benefit from a Democratic or Republican win. The Republican basket (which includes sectors such as Energy, Materials, Utilities and Real Estate) had outperformed the Democratic basket (including solar energy, tech and infrastructure stocks) by 9% year-to-date, as of late August—down somewhat from the maximum spread of 10.2% in early August. The spread’s tightening came on the heels of Harris’ nomination, and sustained momentum for her candidacy could create risks for stocks favored in the event of a GOP victory.
We also looked at a Republican “short” basket, containing stocks that could perform poorly if the GOP candidate prevails. As of late August, it was down more than 18% year-to-date and lagged a comparable Democratic “short” equity basket by wide margins, indicating investors could already be hedging against a Republican win.
Investors should keep in mind, however, that while these indicators may offer insight into sentiment at a given point in time, they are not predictive of actual outcomes, nor should they be viewed as an endorsement of any political party.
Investing in an Election Year
Of course, much can change between now and November. In the meantime, investors may want to watch for potential index-level gains—and possible turbulence—in the weeks ahead. On average, the S&P 500 has risen in election years, with the strongest gains occurring amid split control of Congress and the White House, as gridlock typically limits drastic policymaking. But market volatility also tends to rise in election years, and 2024 may be particularly bumpy given heightened geopolitical uncertainty and political polarization, among other factors.
Importantly, we remind investors that while political outcomes and corresponding policy shifts may impact company profitability, the business and economic cycle are likely to be more relevant to market performance.
Connect with your Morgan Stanley Financial Advisor to understand the election’s potential implications for your portfolio. To learn more, ask your advisor for a copy of the latest US Policy Pulse: 2024 General Election Series report from Morgan Stanley’s Global Investment Office.