It's officially election season. Here's what that means for your portfolio.

It's barely March and I'm already over the 2024 elections. I'm entirely unexcited about the upcoming deluge of campaign commercials.

That said, I get a lot of questions about how elections will affect the stock market in 2024. I have some good news on that front and I have some common rumors that I want to dispel.

Before I jump in though, I want to be clear that my take is driven by data, not partisanship. If you're able to guess my political leanings from the rest of this newsletter, I did something wrong. Now that's out of the way....

Let's set the stage.

Super Tuesday came and went without any real surprises. Donald Trump has cemented his control over the GOP, to the point of securing Mitch McConnell's endorsement. With Nikki Haley officially out and the Supreme Court clearing (some) of his legal issues, the path to the nomination is clear. Joe Biden is the presumptive Democratic nominee, although few seem enthused at the prospect of a second Biden term.

I started to write this paragraph on the policy differences between the two candidates, but nah. You likely already have a decent idea of their differences, no need for me to rehash things.

Instead, let's start by looking at the market's growth based on Presidents' party.

The point that jumps out to me is that the party is largely irrelevant to market growth. I'm sorry if that ruffles some feathers but like I said, I'm data driven.

Next up, markets hate uncertainty. At its heart, the market is a pricing mechanism, adjusting stock prices based on any number of factors. The market can price the effect of bad news and it can price the effect of good news. What it has trouble with is uncertainty and probability.

In our case, this means that the market is typically muted during the first half of an election year. I attribute this to the uncertainty surrounding candidates prior to primary season and then the official conventions.

The numbers are telling.

The average first-quarter return in non-election years is 2.5%. In election years, the average drops to 1.3%.

The numbers are similar in the second quarter. Q2 returns in non-election years average 3.4% while election years average only 1.5%.

But things get better closer to the election, which likely stems from clarity in the polls and a better ability to handicap potential outcomes. The third quarter of election years actually beats non-election years handily, 6.2% to 2.4%.

If you're a visual person, here's the chart version.

(By the way, I borrowed these charts from Blackrock. There are a lot of places to get insight these days, but Blackrock is one of my favorites. They have some fantastic resources if you want to nerd out.)

One final chart, because mostly because I think it's interesting.

What's my takeaway here?

Not all data points are good data points.

As we near the election, you'll probably see something like this shared more and more often.

Ignore it.

You can't draw accurate inferences from two samples.

Folks will use this to prove all kinds of things. Honestly, I would be skeptical any time I saw this, because it tells me that they probably don't have anything better to support their point.

So What Should You Be Doing?

1. Ignore the noise. You'll be hearing a lot of noise but most of it is just that. Don't waste your time.
2. Focus on fundamentals. Inflation data and jobs numbers, are key. The Fed's rate cut decisions are primarily based on these items, so you should pay attention too. It's easy to get caught up in minutiae but these two numbers give a pretty darn good picture of the economy.
3. Don't make investment decisions based on politics. The economy (and the market) has managed to grow despite the best efforts of both parties and that's unlikely to change. Don't be the person who went to cash and missed out because they were worried about the other side winning.

Here's What I'm Reading

• How NBA Star Rex Chapman Gambled Away Millions—and Pulled His Life Back Together - Rex Chapman is an all-time great UK player turned anti-hero. Watching his recovery from addiction has been heartwarming.
• Used car prices have dropped 13.1% over the last year. - I mentioned last year that used car prices had likely peaked and my timing was pretty good. The market for used cars is getting better as new car production has caught up to new car demand, leading to more trade-ins.
• Vineyards embrace AI and IoT for better, tastier wine - Too many startups build their identity around AI, specifically around building a new model. Stories like this are where the real value in AI will be created...traditional industries who adapt AI tools to make their processes more efficient. My prediction is that in ten years, the idea of an AI Company will be scoffed at, as all companies will have adopted AI tools or they will have gone out of business.

In the Markets

• U.S. stocks hit record highs again last week.
• Ten-year U.S. Treasury yields stayed about the same, but slightly below their 2024 highs.
• I'm watching January U.S. payroll data this week. A strong reading could indicate still-high wage growth that will stoke inflation. (I expect both a strong reading and inflation to rear its head again.)

Thanks for reading,

Jeb