As we approach another election, with interest rates likely to fall, many investors are wondering how the stock market will respond. While predicting the future is impossible, history offers valuable insights into how markets have performed in similar situations.
The Election Year Effect on Markets
Since 1926, the S&P 500 has delivered substantial long-term growth, enduring through countless political changes. Over this period, the market has grown by more than 1,456,754%, proving that political leadership—whether Democrat or Republican—has little long-term impact on stock performance.
Presidential election years, in particular, have been favorable for stocks. Historically, the S&P 500 has risen by an average of 11.6% during election years, compared to a 10.3% annual return in non-election years. This suggests that investors who stay focused on long-term goals and avoid reacting to political shifts tend to fare better than those attempting to time the market based on election outcomes.
Falling Interest Rates and Their Influence on the Market
In addition to the election, we’re entering an environment where the Federal Reserve is expected to cut interest rates multiple times. Historically, lower interest rates are positive for equities. When borrowing costs fall, companies invest more, stimulating growth and boosting corporate earnings. This makes stocks, particularly large-cap stocks like those in the S&P 500, more attractive than bonds and other fixed-income assets, leading to higher demand for equities.
Election + Rate Cuts: A Powerful Combination?
What happens when a post-election year coincides with falling interest rates? History suggests that this combination often creates a favorable environment for stock market growth. Most recently in 2009, when the Federal Reserve cut rates following the financial crisis, helping drive the S&P 500 up by over 23%. While 2025 won't exactly replicate past scenarios, the combination of political clarity and lower interest rates has historically resulted in strong market performance.
What to Expect in 2025
Looking ahead to 2025, there are no certainties, but several factors point toward a positive market outlook. With the Federal Reserve poised to cut rates and the economy showing resilience, the post-election environment could be supportive for equities. The key lesson? Don’t let election-year uncertainty or speculation about interest rates derail your investment strategy. Historically, these conditions have created favorable opportunities for long-term investors.
As always, it's important to stay committed to your financial goals, avoid emotional responses to short-term events, and maintain a long-term perspective on your investments.
Disclaimer: This blog is for informational purposes only and should not be taken as financial or tax advice. Always consult with your legal, tax, or financial advisor before making any changes to your financial plan.