2024 U.S. election perspectives - Divided government a positive for stocks

MFS Investment Management is the sub-advisor to the Sun Life MFS mutual funds.

This article was first published in the United States by MFS Investment Management in September 2024 and is republished in Canada by SLGI Asset Management Inc., with permission. MFS Investment Management Canada Limited is the sub-advisor to the Sun Life MFS Funds and has appointed MFS Institutional Advisors, Inc. to provide additional sub-advisory services. This article discusses the impact that a divided U.S. government could have on markets.

Our research shows that U.S. equity returns have historically been strong in presidential election years, averaging 7.5% since 1928. In our opinion, the second-best year for returns typically come in the last year of the four-year presidential cycle, with most of the returns generated in the year’s second half. But what’s most surprising is that stock volatility, as measured by annual standard deviation, is nearly identical during election years and non-election years, going back to 1928.

Markets hate uncertainty, and that tracks with the fact that they perform better in the fourth year of a president’s first term than that of a lame duck president. However, this is an unusual election given Biden’s atypical lame-duck status, so we can potentially rip up that script. Historical analysis shows that equity markets don’t have a strong preference for which party controls Congress.

The reality is that the best performance has been achieved with a divided Congress regardless of who is in the White House because having checks and balances in place between the branches of government helps prevent the passage of overly ambitious policies which can create uncertainty and volatility in the markets.

While presidential elections matter to the economy and the markets, we believe they matter less than most investors think. Presidents may influence inflation, but they don’t control supply chains, the velocity of money or base effects. They can propose tax rates, but they can’t anticipate how companies and the public will react to them. And while they may govern during a bull market (and hope to take credit for it), there are many factors that determine the fate of the stock market that are outside of the control of politicians. This election is important, but in our view, rigorous fundamental analysis of companies and markets will have more to do with investor outcomes than political analysis.

MFS Investment Management Canada Limited is the sub-advisor to the Sun Life MFS Funds and has appointed MFS Institutional Advisors Inc. to provide additional sub-advisory services

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SLGI Asset Management Inc. is the investment manager of the Sun Life family of mutual funds.

Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada, and Sun Life Financial Trust Inc., all of which are members of the Sun Life group of companies.

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