Election season always brings a sense of heightened anxiety, with many people worrying about how the outcome will affect the economy, their investments, and the market as a whole. This concern has only intensified over the past nine months as we’ve entered the long stretch leading up to major political shifts. While it’s tempting to react—maybe reduce risk or even pull out of the market to “wait it out”—it’s important to recognize a key fact: elections don’t cause bear markets. They never have.
Yes, elections can lead to volatility. Uncertainty tends to make people nervous, and nervous people make rash decisions. But the real danger in these times isn’t a political shift—it’s the opportunity cost of stepping out of the market during times of potential growth. If you had taken money out of the market at the start of this election cycle, what would you have missed? This year alone has seen incredible performance in stocks, and even bonds. Those who chose to side on the sidelines have missed out on significant gains.
The Cost of Missing Market Days
Data shows that market returns can be disproportionately driven by a few high-performance days. In 2024, for example, the 14 highest-performing days accounted for all of the year to date growth in equities. If you missed only those days, your returns would be zero.
Now, think about this: many of those high-performance days came right after sharp drops. That means if you had panicked during a downturn and exited the market, you’d have missed the subsequent rally. It’s easy to react to down days emotionally, but market timing is notoriously difficult and rarely effective. Missing just a handful of trading days can dramatically impact long-term returns.
The Real Drivers of the Market
So, if elections don’t cause bear markets, what does? Historically, markets are primarily driven by corporate earnings and economic conditions, such as recessions or Federal Reserve policies around interest rates. While a deeply aggressive Federal Reserve can lead to recessions, that’s not always the case. In fact, despite the much-feared inverted yield curve—a reliable recession predictor—the economy has proven resilient, with no recession in sight as of now.
Bear markets are rare, and when they happen, they tend to be triggered by significant economic shifts rather than political ones. Since 1957 – nearly 70 years ago – there have been just 12 bear markets. What’s remarkable is how, time after time, the market bounces back and hits new highs.
For example, we’re currently two years into a bull market that began in October 2022, with the S&P 500 rising more than 60% since its low point. If you had stepped out of the market at the start of that difficult time, you’d have missed a significant recovery. Historically, after a bear market, the odds are overwhelmingly in favor of the next few years being positive—82% of the time, two-year returns are positive after a bear market.
The Psychology of Fear
People have always found things to worry about, whether it was nuclear fallout shelters in the 1960s or today’s political uncertainty. Yet, most of these fears don’t manifest in ways that derail long-term growth. We live in a world where fear sells—especially on social media. This leads to extreme voices being amplified which can cloud judgment when it comes to financial decisions.
Recently, I’ve been following a family on social media who are using a Cold War-era fallout shelter to store canned food. Back then, when the shelter was built, the worry of the day was nuclear annihilation; today, they use the shelter for canning. Their fear of a specific disaster never came to pass, and the shelter is now a conveniently temperature-controlled storage space. Similarly, fears about an election’s impact on your portfolio may never materialize in the way you imagine.
Market Resilience and Long-Term Growth
Despite the news cycle’s focus on elections and political uncertainty, markets have historically rallied once the future becomes clearer. We’ve seen this repeatedly—when markets have an idea of what the future holds, they tend to rise. Currently, despite all the election chatter, we’re seeing strong corporate earnings, steady consumer spending, and a labor market that’s holding up well. These are the real factors driving the market forward.
Interestingly, markets have historically performed well after strong two-year periods like the one we’re in now. In fact, 80% of the time, the market continues to deliver solid returns in the third year following a recovery. While the gains may be more muted compared to earlier periods, history shows that after a rally like the one we’ve seen, it’s more likely the market will grind higher rather than reverse course.
Innovation and Global Market Strength
Another thing to remember is that the U.S. remains the hub of global innovation and market leadership. While other regions, such as Europe, struggle to foster tech entrepreneurship at the same scale, the U.S. continues to dominate. The U.S. accounts for around 70% of global market capitalization, and tech innovation plays a huge role in that dominance.
This year’s market rally has been largely driven by the tech sector, with companies like NVIDIA leading the charge. But it’s not just tech—other sectors, like industrials, have also contributed to gains, signaling that this isn’t just a one-trick market. As the economy continues to broaden out, so too do investment opportunities.
Stay the Course
It’s easy to let fear and uncertainty dictate your investment decisions, but doing so could mean missing out on future gains. The market is driven by corporate earnings, economic growth, and innovation—not political events like elections. By focusing on the long-term and sticking with your investment strategy, you’re more likely to benefit from the market’s resilience and ability to recover.
As we move toward the end of 2024, there’s reason to be optimistic. Corporate earnings are growing, the Federal Reserve is easing its stance on interest rates, and the economy remains in decent shape. While volatility is likely to persist, the data shows that the market is likely to continue its upward trend into 2025, barring any unforeseen catastrophic events.
The lesson here? Don’t let the noise distract you from your long-term goals. Stay invested, stay patient, and let the market do its work.
