Investors wondering how much further the global stock market rally can go might want to take a lesson from history, because share prices appear to be following a tried and trusted pattern.
Basically, they are copying the US electoral cycle, according to Tom Stevenson, investment director at fund manager Fidelity.
He notes that the US S&P 500 is up 28 per cent in the past year – and it is not the only index booming today. “From India to Japan and Europe too, shares are hitting new highs as the bull market goes global.”
This chimes with the four-year cycle of returns that markets typically deliver around the US presidential election.
Historically, the first two years after an election are poor, as the White House pushes through more unpopular measures, Mr Stevenson says.
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“Then, after the midterm elections, markets tend to pick up as the incumbent president does what they can to get re-elected.”
So far, Democratic President Joe Biden’s term is matching that template. “Last year was a barnstormer for the US market and 2024 has started strongly too,” he adds.
If he is right, we can expect the bull run to continue at least until election day on Tuesday, November 5, when voters will almost certainly face a repeat run-off between Mr Biden and Republican Party candidate Donald Trump.
After that, hold on to your hats. But is it that simple?
Jason Hollands, managing director of fund platform Bestinvest by Evelyn Partners, says there is plenty of evidence to back this up. There have been 19 election years since the Second World War and the S&P 500 has delivered a positive return in 17 of them.
The exceptions are 2000, when George W Bush defeated Democratic Party candidate Al Gore against the backdrop of the bursting dot-com bubble, and 2008, when Barack Obama swept to power during the financial crisis.
The easy answer is that incumbent presidents typically “juice” the economy to boost their election hopes, Mr Hollands says. “It may also reflect growing investor optimism about the pledges being made and the prospect of welcome change.”
Smaller and medium US companies typically do better in election years, which Mr Hollands says may reflect the fact that they have a greater exposure to the domestic market.
At the same time, bigger companies tend to have an international focus. “A broadening of the US stock market rally beyond the so-called Magnificent Seven mega-cap tech stocks would be very healthy,” he says.
Russ Mould, investment director at AJ Bell, also sees strong economic and political reasons why the current US bull market – and, by extension, global stock markets – will continue.
“Right now, America is spending money like it’s going out of fashion. The $1.7 trillion deficit racked up in the fiscal year to September 2023 was the third biggest on record, and an even bigger number is on the cards for 2024. This is boosting the economy and corporate profits, but whether it is it sustainable is an open question,” Mr Mould says.
Monetary policy can also play a part, he adds. “US Federal Reserve chair Jerome Powell won't want to oversee a recession during an election year. Markets remain convinced the Fed is poised to sanction half a dozen interest rate cuts in 2024, starting in March.”
If correct, that will boost cut business costs and consumer spending power, firing up the economy and stock markets.
However, Vijay Valecha, chief investment officer at Century Financial, suggests that the best part of the bull run may now be over.
Since 1928, Wall Street has delivered an average 6.63 per cent in the first year of a presidential term and 3.33 per cent in the second year.
It is year three where the action is, with an average return of 13.96 per cent, which slows to 7.37 per cent in year four.
The US S&P 500 jumped 25 per cent in 2023, Mr Biden’s third year. If history repeats itself, we can expect more modest growth this year. But that is still growth.
We should not write off 2025, either.
Since 1970, Wall Street has enjoyed a notable post-electoral bounce, driven raised hopes and fresh policies, Mr Hollands says.
“In Mr Trump’s first year, the S&P 500 posted a 21.8 per cent return as tax cuts got delivered. It rallied 28.8 per cent in Mr Biden’s first as the US economy – awash with stimulus – rebounded from Covid.”
Finally, do stock markets care who actually wins in November? Here, things get muddy.
Mr Hollands says a triumphant Mr Trump could extend the tax cuts enacted in his first term, which are currently due to expire by 2027, and deregulate parts of the economy.
While that would be a boost for markets, his trade policy is a wild card.
Mr Trump has pledged a universal tariff of 10 per cent on all imports, along with tit-for-tat tariffs on any country that applies tariffs on US exports and up to 60 per cent tariffs on Chinese imports.
“It’s difficult to know how these might play out for stock markets, but it clearly injects a degree of uncertainty,” Mr Hollands says.
Mr Trump is also a climate change sceptic who could boost the US oil industry with his pledge to “drill baby, drill”, Mr Hollands says. “Defence companies could suffer given Trump’s isolationism and reluctance to continue funding Ukraine.”
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While Mr Trump has floated the idea of cutting the corporate tax rate to 15 per cent, from today’s 21 per cent, Mr Biden may raise it to 28 per cent, Mr Valecha says.
“Mr Biden also proposes an increase in taxes on stock buy-backs and plans to make it harder for businesses to exploit international tax regulations to evade US taxes,” he says.
Yet, markets may not always respond in the way we expect, Mr Valecha adds.
“Studies show that in years when corporate tax rates were increased, the S&P 500 delivered a better return than when they were reduced.”
There is one more element to consider. Is politics just noise and should investors let it wash over them and focus on their portfolios?
The answer is yes, says financial historian and senior investment adviser Mark J Higgins, an authority on the subject, having just published a new book, Investing in US Financial history: Understanding the Past to Forecast the Future.
Mr Higgins says only three US presidents in history have had a major direct impact on the country’s economy: Andrew Jackson, who abolished the US national bank in 1836; Franklin D Roosevelt, who pulled the US out of the Depression in the 1930s with his New Deal; and Lyndon Johnson, whose Great Society programme led to a surge in federal spending and debt.
Mr Biden and Mr Trump don’t figure at all.
“We overestimate the impact of politics on markets. Everyone gets caught up in it. There is an awful lot of shouting. Investors need to tune it all out,” Mr Higgins says.
That’s sound advice but will prove difficult to follow in this election – more than almost any other.
