Election jitters, looming uncertainty impact business and investments
Business people and investors generally feel less confident during election years, bracing for the possibility of policy changes that might affect them negatively.
This year is the biggest election year in history. More than half of the world’s population in 76 countries is heading to the polls. Regardless of the outcome, their impact on business is inevitable. Businesses across all industries need to be aware of the turmoil elections can bring and adapt quickly.
In the United States, a rematch between presumptive Democratic candidate Joe Biden and presumptive Republican candidate Donald Trump is expected to have pivotal consequences in the stateside, local and global economy and business environment.
Election years breed uncertainty
An election year is a time of uncertainty. This uneasiness stems from each party’s values and beliefs on how the government and economy should be run, and from the candidates themselves.
Candidates often make campaign speeches promising more jobs, lower taxes, a stronger economy, and new environmental standards, among other things, and who will win and whether any of the promises will be kept is anybody’s guess.
Business people and investors generally feel less confident during election years, bracing for the possibility of policy changes that might affect them negatively. As the year progresses and predictions fluctuate, so does the stock market and the decision-making process throughout the business world.
While Congress impacts legislation, the president drives and executes changes in the U.S. government and economy. A Republican president is likely to be business-friendly and favor a free market with limited government regulation, while a Democratic president tends to favor a bigger government.
Impact of elections on business
U.S. presidential elections tend to affect businesses in the following key areas:
Economic Uncertainty: Uncertainty during election year may cause companies to delay investments, hiring or decisions that affect the overall economy.
Policy Changes: New presidents seek to enforce their own policies on taxes, trade, regulations, healthcare, labor, and other crucial issues that can affect the cost of doing business.
Trade: Election-driven trade wars can result in high tariffs on raw materials that have a trickle-down effect on supply chains, wholesale and retail. Elections and changes in leadership often affect diplomatic relations between countries, further disrupting trade.
Government Contracts: A new administration generally has different priorities and ideologies than the former one, thus influencing the fate of current and future government contracts.
Consumer Confidence: As debates heat up during election year, candidates use issues such as inflation, potential recessions, unemployment, taxes, and others against each other, leading many consumers to question the economy and hold back their spending.
Stock Market: Elections can cause short-term volatility in the stock market, which affects businesses that rely on it for capital. However, though elections can be disruptive, history shows the stock market performs well in the long run regardless of which party is in power.
Supply Chains: Because increased uncertainty can prompt businesses to delay investments and build inventories, elections may create additional risk and disruptions to supply chains. Changes in trade policy, foreign relations, labor laws, infrastructure and transportation usually affect the cost and flow of imported and exported goods.
Real Estate: Election cycles can impact the real estate market by influencing affordability (prices, mortgage interest, property taxes, etc.) and demand (buyer and seller hesitation due to uncertainty).
Effect of local and U.S. elections in Puerto Rico
The biggest effect the 2024 election year will have in Puerto Rico is the uncertainty stemming from the U.S. presidential elections, said José Villamil, founder, and CEO of Estudios Técnicos, a leading local planning, research, market strategy, social analysis, and economic advisory consulting firm.
“Much of what happens in Puerto Rico’s economy is due to federal funds, and those funds will continue without change throughout the year,” Villamil told News is my Business.
Villamil explained that the local elections for governor usually don’t have a significant impact on business on the island. The likelihood of the New Progressive Party (PNP, in Spanish) remaining in power suggests stability in business and investor-related programs, he said.
“What’s positive about that is continuity,” Villamil said, noting that a string of governors has come and gone since 1996 and that 2024 will be the first election in more than 20 years in which the possibility exists of having the same administration in place for eight years. “Whether one approves of the party or governor, continuity has its advantages.”
Election-year worries: surveys
Given the impending Biden-Trump rematch, companies and investors can’t help but worry.
Businesspeople are concerned about private investments in medium- to long-term projects because these can be affected by election results, especially the presidential elections, Villamil said. “Investors are uneasy about investing because they don’t know what’s going to happen,” he added.
More than half (61%) of investors recently surveyed by Investopedia are worried about the 2024 U.S. presidential election affecting their portfolios. At 68%, Republican investors are slightly more likely to expect the presidential election will have a direct, immediate, and lasting impact, compared to 57% of Democrats.
Of 1,000 mass affluent and high-net-worth investors who took part in a Janus Henderson Investors survey, 49% said they’re very concerned about the 2024 elections, and 29% said they’re somewhat concerned. Election worries eclipsed the investors’ concerns about inflation, risk of recession and rising interest rates, JHI reported.
A Nationwide survey found that 45% of the investors surveyed believe the 2024 election will have a bigger impact on their portfolios and retirement plans than market performance. If the political party with which they least align gains more power, 32% of the investors believe the economy will plunge into a recession within 12 months; 31% believe it would negatively impact their future finances, and another 31% believe their taxes will increase within 12 months.
Nearly half (46%) of the financial advisers surveyed said inflation is the most immediate challenge to their clients’ retirement portfolios. But, like investors, they’re not immune to a partisan bias: 38% believe the stock market will be volatile for the 12 months following the election if the party they least align with gains more power, according to Nationwide’s survey.
For Puerto Rico, the outcome of the elections is of critical importance, Villamil said. “It’s one thing if Biden wins and quite another if Trump wins. These are two scenarios with very different implications and complications,” he said.
More on the U.S. stock market
The effect of the U.S. presidential elections on capital markets has been studied by numerous research firms, and their findings tend to be similar: a minimum effect.
For example, an analysis by U.S. Bank Asset Management Group, found that the 2024 elections will have minimal medium- to long-term impact on financial market performance.
According to the study, two scenarios corresponded to positive absolute returns more than long-term average returns: (1) Democratic control of the White House and full Republican control of Congress and (2) Democratic control of the White House and split party control of the Senate and House. One scenario corresponded to positive absolute returns modestly below long-term average: Republican control of the White House and full Democratic control of Congress.
Market returns are typically more dependent on economy and inflation trends rather than election results, U.S. Bank reported.
The good news
Despite election jitters, historical data shows that markets tend to rise in presidential election years, with the S&P 500 recording positive returns in 83% of the 24 election years since 1928, according to a recent Investopedia survey. The average return for those election years was 11.58%, well above the S&P 500 average annual return of 9.81% since 1928, Investopedia reported, citing First Trust data.
Most financial advisers (56%) believe that staying the course — not changing their clients’ investment strategies — is the best course of action in an election year, Nationwide reported.
