Election 2024: Politics and Your Portfolio

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The U.S. presidential election has gripped the nation. Should it take hold of your portfolio, too? The short answer: No.

Financial fundamentals such as the direction of interest rates and corporate earnings hold more sway, especially over the long term. But it doesn’t hurt to be aware of what history tells us about elections and financial markets and to consider how potential policy moves could impact your investments.

Predicting election outcomes is more art than science, and at this writing, we don’t yet know who will move into the White House in January. One clue will come from the market itself. If the S&P 500 index moves higher in the three months leading up to the election, the incumbent party tends to win; the opposite is true when the benchmark is down. This simple indicator has been on target in 20 of the past 24 elections, according to LPL Financial.

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Best scenarios for your portfolio

In late summer, the race for president was a toss-up between Donald Trump and Kamala Harris; the odds were in favor of Republican control of the Senate and a Democratic House of Representatives.

Going back to 1945, the best scenario for stocks has been a Democratic president and a split Congress, says Sam Stovall, chief investment strategist at CFRA Research. That configuration has resulted in average calendar-year price gains for the S&P 500 of 16%, compared with an average annual gain of 9.2% over the entire period.

The second-best scenario has been a Democratic president and a unified Republican Congress, with average gains of 13%, followed by a Republican sweep, with average gains of 12.9%. This time, “gridlock is likely,” write strategists at BofA Global Research. “Historically, legislative stagnancy has fostered equanimity in the stock market,” they add.

How policy moves can impact portfolios

Of the big themes investors are watching, including global trade and immigration, “the market is most worried about changes in the corporate tax rate,” says Shannon Saccocia, chief investment officer of Neuberger Berman Private Wealth. Harris has talked about raising the rate to 28%, up from 21%; Trump has floated lowering it to 15% for U.S. manufacturers.

More: A Look at Donald Trump's Tax Plans Ahead of the Election
More: A Look at Kamala Harris's Tax Plans Ahead of the Election

A change would impact small stocks the most, says Saccocia. Unlike giant multinational firms, with global sources of income and access to a number of deductions, “small, domestically oriented companies pay the full ride. For them, the corporate tax lever is really important.”

Sector-wise, the Republican policy platform favors energy, financials, industrials and materials, according to investment strategists at BCA Research. Harris’s agenda would benefit consumer discretionary and industrial stocks but put regulatory pressure on financials and technology, although BCA believes that a split or opposing Congress would constrain a Democratic wish list.

More: 5 Stocks to Buy for a Harris Presidency
More: 5 Stocks to Buy for a Trump Presidency

Even in a contentious election season, there are areas of agreement. “Bipartisan themes around infrastructure and growing U.S. manufacturing should benefit ‘old economy’ sectors like industrials, materials and energy,” according to BofA.

Leading up to the election, expect more volatility. That argues for a near-term tilt toward defensive sectors such as health care and utilities. And keep politics in perspective as just one of many factors that could impact your investment strategy.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.