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How a critical election year could impact markets and the economy

Phil Rosen   

How a critical election year could impact markets and the economy
  • Goldman Sachs broke down the repercussions of the US election in 2024.
  • They note that elections impact economic growth, monetary policy, and financial uncertainty.

A record share of the world's population will cast their vote in an election this year.

According to a Goldman Sachs analysis of more than 1,000 elections across 152 economies, elections tend to impact monetary policy and raise economic uncertainty, and sometimes financial markets can swing as a result.

The US presidential election isn't the only electoral contest in focus — the EU has parliamentary elections, the UK is set to hold a general election, and emerging markets economies including Indonesia, India, South Korea, and Mexico will also see key votes.

A looming Trump-Biden rematch could prove "particularly market-relevant," strategists wrote in a Tuesday note.

First, history suggests incumbent politicians tend to steer outcomes by easing fiscal policy in the run-up to the election, according to the bank. Primary fiscal balances tend to decline in election years as a result of spending increases and revenue declines, strategists noted.

Monetary policy rates also tend to ease during election years, but that is less true for countries like the US where central banks maintain a relatively high degree of autonomy.

Disagreement and uncertainty tend to ramp up in US presidential election years. That uncertainty spans fiscal, regulatory, national security, and trade, according to Goldman.

"[E]ven in the absence of strategic policy adjustments in the run-up to elections, the policy uncertainty inherent to elections and the possibility of leadership change could pose a modest headwind to investment and growth," strategists said, adding that the effects of this uncertainty are short-lived.

As far as economic growth, Goldman Sachs data shows a "modest hit to annualized GDP growth of 0.2-0.3pp in quarters around elections, with a smaller effect of 0.1-0.2pp on full-year GDP growth."

In a separate outlook last week, iCapital's investment chief Anastasia Amoroso maintained that traders don't have to sweat the looming presidential showdown. The input for stocks, in her view, ultimately won't be political tumult, but rather earnings and Fed policy.

Not only that, but Amoroso highlighted that US stocks typically delivered strong returns during election cycles.

"In the last eight election cycles," Amoroso said, "the S&P 500 delivered a median return of +7.5% and +4.2% in the 12-months and 9-months leading up to election day, respectively, with positive outcomes 87% and 75% of the time, respectively."

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