Why Long Term Investing Matters More Than Who’s in Office

As the U.S. presidential election season closes, market watchers are once again evaluating how political outcomes might influence the stock market. While short-term reactions often mirror immediate political climate shifts, historical data suggests a more resilient story: the stock market tends to follow its own path, influenced more by underlying economic fundamentals than by which political party holds power. For investors, this distinction can serve as a guidepost, reminding them to stay focused on the fundamentals and avoid knee-jerk reactions. Here’s a closer look at how the market behaves across party lines, why staying the course is crucial, and where top analysts expect the market to head by year-end.

1. The Long-Term Market Direction and the Limits of Political Influence

In the grand scheme of investing, one pattern is clear: over the long haul, the stock market has trended upward, irrespective of the party in control. Since the early 20th century, the S&P 500 has generated an average annual return of around 10%. This growth trajectory suggests that, while policies introduced by individual administrations can affect certain sectors, the overall direction of the stock market has more to do with technological innovation, corporate growth, and global economic health.

Some of the most noteworthy years for stock market growth took place during periods of divided government, highlighting the limited impact that partisan control has on market direction. Historical election-year data from the S&P 500 shows that markets have a knack for adapting, averaging a positive return of around 7% during presidential election years since 1952. Despite fears or hopes tied to specific outcomes, the overall market rarely experiences major deviations from its long-term growth pattern in response to election results.

2. Historical Market Performance Under Democratic vs. Republican Leadership

One area of constant analysis has been how the market performs under different administrations. Historically, some interesting trends emerge:

• Under Democratic Administrations: The market has generally seen strong returns. For example, during President Barack Obama’s two terms, the S&P 500 more than doubled in value, returning around 14% annually from 2009 to 2016. Similarly, in President Joe Biden’s term, the S&P 500 has continued to grow, even setting record highs as economic recovery initiatives spurred investment and growth.

• Under Republican Administrations: The market has also performed well, but typically at a slightly slower pace. Under President Donald Trump, for example, the S&P 500 experienced an annualised return of around 11.8%. Tax cuts and corporate incentives boosted investor confidence, particularly in large-cap stocks. However, economic conditions like the global pandemic in 2020 underscored that external factors play a significant role in market performance.

While each party has its approach, long-term investors will note that the market has generally continued to grow under both administrations. This steady upward trajectory reveals that while policies may differ, corporate earnings and innovation have been the primary drivers of market success.

3. Why Staying Invested Matters More Than Political Outcomes

For many investors, emotions can run high around election time. Media coverage and public sentiment can amplify fears about market direction, creating an illusion that each election cycle brings existential consequences for portfolios. In reality, market reactions to political events are typically short-lived.

When investors make decisions based on fear or short-term thinking, they risk missing out on significant gains. Historically, even when markets have dipped in response to political changes, they tend to recover quickly. For example, following the election in 2016, the S&P 500 saw an initial drop but rebounded strongly, with several major indices reaching new highs within weeks.

Instead of attempting to time the market based on political shifts, investors are better served by a long-term approach. Remaining focused on a diverse portfolio that aligns with individual goals, risk tolerance, and timelines can offer far better security than trying to outguess political impacts.

4. Projections for the S&P 500 by Year-End 2024

The S&P 500 has already made headlines this year, reaching a record high of 6,012, which underscores the strong momentum seen in 2024. This new milestone has analysts recalibrating their projections, with several top financial institutions now predicting potential for further gains through year-end and into 2025.

• Goldman Sachs recently updated its year-end target for the S&P 500 to 6,000, up from its previous forecast of 5,600. However, with the index already surpassing that target, Goldman has introduced a 12-month outlook, suggesting a potential climb to 6,300, supported by anticipated corporate earnings growth and stable economic conditions into next year.

• Morgan Stanley: In November 2024, Morgan Stanley's Chief Investment Officer, Mike Wilson, suggested that the S&P 500 could surge another 5% by year-end, potentially reaching 6,100. He noted that while the market may face a pullback amid fiscal consolidation next year, the current momentum could drive short-term gains.

• BMO Capital Markets initially set a target of 5,600 for 2024, which implied roughly 7% growth at the time. However, this target is now expected to be revised upward given the recent market performance.

• Capital Economics set an end-of-year target of 5,500, though this forecast may soon be adjusted as the S&P 500 continues its upward trend.

These projections highlight the market’s positive outlook, with institutions signalling room for further gains beyond the recent record. For investors, this serves as a reminder of the value of maintaining a disciplined, long-term perspective. While analysts see potential for the S&P 500 to continue climbing, investors should remain aware of factors that could influence the market in the coming months, such as shifts in economic indicators, corporate earnings, and international events.

5. Putting Emotions in Check: The Key to Investment Success

One of the biggest challenges investors face is maintaining emotional discipline, particularly during election cycles. Emotions can drive short-term decisions that lead to suboptimal returns, especially when investors react to temporary volatility. Investing is often likened to a marathon, not a sprint—staying the course, even when market fluctuations feel intense, is key to achieving lasting results.

Historically, investors who stick to a consistent investment plan tend to perform better than those who try to time the market. A recent study from Fidelity found that the best-performing accounts belonged to investors who held onto their portfolios without frequent trading, underscoring the power of emotional resilience in investing. Taking a long-term perspective, while occasionally adjusting for personal financial goals, allows investors to benefit from compound growth and market recovery periods.

Conclusion

While political outcomes may influence short-term market movements, the long-term growth of the stock market remains anchored by economic fundamentals rather than partisan shifts. For investors, staying focused on personal financial goals, maintaining discipline, and resisting the urge to react emotionally can make all the difference. With the S&P 500 expected to close out 2024 on a high note, the outlook for those with a steady investment approach appears promising.

No matter which political party holds power, the market’s resilience proves that time in the market beats timing the market. If you’re ready to take control of your financial future and remain steady on your investment journey, consider speaking with a financial advisor who can guide you through market cycles and help keep your focus on the bigger picture.

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