Former President Donald Trump and President Joe Biden once again secured their respective party nominations, setting up a second election face-off this fall.

The outcome in November remains far from clear, yet this much is certain: The presidential election season is in full swing and the volume of election chatter is turned up high. The noise in the news could be distracting when you’re trying to think clearly about your investments. We’ll say it again: Markets typically tend to consider the economic backdrop as its primary driver and not election results.

But not everything in the election news cycle is just noise.

We’ve broken down investing-related election issues into those you should consider because they could impact your investments, and the ones that are just myths you can feel free to ignore.

Three ways the election may affect markets

Three ways the election may affect markets

Democratic and Republican administrations would differ in ways that could impact the markets. Here are three issues on our radar:

Tariffs

Former President Donald Trump has suggested the possibility, if he’s elected, of imposing a universal 10% baseline tariff on all U.S. imports from all countries, rising to 60% on all imports from China. That move would likely be met with stiff resistance. But if there is a second Trump term, investors should expect higher tariffs, which could impact the profit margins of select importers of goods, particularly Chinese goods.

Tariffs can also have a secondary effect: strengthening the currency of the country imposing them. So the U.S. dollar might also strengthen relative to other currencies under a Republican presidency, as it did in 2016, when the dollar rallied nearly 5% versus other major currencies. Note, though, that over time, this knee-jerk dollar reaction to the election faded. A second Biden term might lead to a smaller reaction in the foreign exchange markets, as the prospect of additional tariffs would be much less likely.

Tax cuts

Another difference between candidates: Their approach to the well-known Tax Cuts and Jobs Act (2017) that lowered many Americans’ tax bill. When it expires in 2025, federal taxes would rise for most U.S. households – unless its provisions are extended. President Biden says he would extend many of the provisions for taxpayers earning under $400,000. Former President Trump says he’d extend all of them, permanently. Regardless, it will be hard for either president to enact tax legislation if the opposing party controls both or even just one chamber of Congress.

At a time of rising deficits, both candidates may struggle to find offsets for this lost tax revenue – which could push bond yields higher on concern about the deficit. (This is because a worsening federal debt outlook could lead some bond investors to demand higher compensation for taking on modestly higher default risk.)

Near-term changes in sector performance

Once election results are in, a new administration’s policy proposals could lift particular sectors – though historically this bump has faded over time. Aerospace, defense, financials and small- and mid-cap stocks often rise under Republican presidents. Healthcare and green energy stocks tend to get a boost when a Democrat leads.

An important caveat: High-impact policy proposals often depend on Congress, and adoption is more likely if the same party controls the White House and the legislature. Today, the balance of Congressional power after November looks uncertain. And even with a majority in one or both houses, market-moving policies can still confront challenges and bottlenecks.

Three myths about elections and investing

Several common myths about election years persist. We debunk the three we hear most often:

Myth 1: tocks don’t do well in election years

Election year stock returns have sometimes underperformed non-election years slightly. We looked at the S&P 500 in election versus non-election years since 1928 (as far back as we have data): Stocks returned a solid 7.5%, on average, in presidential election years, and an only slightly stronger 8% in non-election years.

Exhibit caption: Stock returns don’t tend to differ much in election years

To be sure, while volatility is a feature of investing in any year, election years tend to be more volatile, especially just before the vote. The uncertainty tends to make it more pronounced (some investors take some risk off the table in close elections, and then put it back to work once there is more clarity on policy). After polling results are announced and the uncertainty dissipates, stocks have tended to rally. Looking at 40 years of Election Days, stocks have been higher, on average, one year later.

Myth 2: Markets will go down if so-and-so wins

Here’s the reality: The economic backdrop at election time tends to matter more than the victor.

It’s true that some election years have seen bigger swings than others, but the reasons, though, were largely macroeconomic.

For instance, in 2020, COVID-19 lockdowns and re-openings impacted broad markets much more than the opposing candidates’ ideologies. Or consider 2008, when Democrat Barack Obama ran against Republican John McCain: The unfolding global financial crisis was the predominant driver, not either candidate’s view on the Iraq War or healthcare. When the market has fallen post-election, it was almost always because a recession was imminent or because (as in 2008) the economy was already in recession.

Myth 3 The Federal Reserve (Fed) won’t change policy in election years.

Reality: The Fed has not shied away from hiking or cutting rates during election years.

The Fed has shown some hesitancy about moving interest rates the two months before a November presidential vote, but for the rest of an election year, policymakers have historically done what they wanted to. Since 1956, the Fed has raised or lowered interest rates in every election year save one (2012).

The Fed is focused today on softly landing the economy without stalling growth, and it’s no small task. The pivot toward rate cuts requires careful navigation to ensure inflation continues to moderate and that growth doesn’t tip into recession.

Don’t lose sight of your long-term goals

While politics can evoke strong emotions, we urge you to not lose sight of your long-term investment goals. We believe the economy will remain the market’s most important driver.

Of course, there are risks from ongoing friction points, including inflation and geopolitics. But our view is that if growth holds up, price pressures abate and the Fed embarks on a rate-easing path, ample opportunities may arise for multi-asset investors, regardless of the election.

Your J.P. Morgan Advisor is here to help you navigate the shifting landscape and create a portfolio that is built to last, through business cycles and elections.

IMPORTANT INFORMATION

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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