Key takeaways
With the 2024 election season already making headlines, voter preferences are likely to be influenced in part by the state of the economy and markets.
While stocks have seesawed over the course of the Biden administration, the S&P 500 recently hit all-time highs.
The U.S. economy has proved surprisingly resilient in the face of efforts by the Federal Reserve to slow growth in an effort to lower inflation.
As voters prepare to go to the polls in a presidential election year, many are assessing the state of the economy and what it means for their own financial lives. The economy tends to be a primary topic of debate in most presidential campaigns, and that promises to be no different in 2024, as President Joe Biden seeks a second term in office.
The U.S. economy has managed to grow throughout most of Biden’s term in office, beginning with a rapid expansion in 2021, followed by more modest growth in 2022 and an upturn in late 2023.
In 2023, the economy grew at a pace of 2.5%, surprising many analysts who expected slower growth or even the possibility of a recession, stemming in part from Federal Reserve (Fed) monetary policy.1 The Fed, in early 2022, turned its focus to slowing the economy and tempering inflation, which became a major issue beginning in 2021. The Fed raised short-term interest rates 11 times between March 2022 to July 2023.
Despite that, the U.S. labor market remained strong, wage growth began to exceed the inflation rate, and consumers maintained consistently solid spending, which proved to be the most important factor driving economic growth.
In addition, government spending was a positive contributor to economic growth. “Spending programs that passed in the first two years of the Biden administration had an influence on the rate of economic growth in 2023,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. These included an infrastructure investment package and the Inflation Reduction Act, which includes incentives for green energy projects. Those dollars started to have more impact in 2023, and may again in 2024, according the Haworth.
As for the stock market during Biden’s tenure, it experienced whipsaw-like volatility. The benchmark S&P 500 generated impressive returns of 28.7% in 2021 and 26.29% in 2023. Sandwiched in between was a bear market, as the S&P 500, at its low point, lost 25% of its value in 2022.2 The market in 2021 benefited from the U.S. economy growing at its fastest pace since 1984. However, rising inflation and the Fed's aggressive response to it, took a toll on stocks in 2022. 2023’s stock market recovery was narrower in nature, driven primarily by a small group of S&P 500 sectors dominated by technology-oriented stocks. In the opening weeks of 2024, the S&P 500 reached new all-time highs, closing over the 5,000 mark for the first time.
The bond market looks significantly different in the fourth year of President Biden’s term, compared to when he took office. This primarily occurred because of the Fed’s early 2022 monetary policy shift. The Fed raised interest rates by 5.25% in a 16-month period. In response, yields on the benchmark 10-year U.S. Treasury note, which were below 1% at the outset of 2021, rose as high as 4.98% in October 2023, before declining to 4.03% by the end of 2023.3 While bonds generated negative total returns in 2022, returns were modestly positive in 2023. 10-year Treasury bond yields have drifted moderately higher in early 2024.
Interest rates and the economy drive markets
Although the political and policymaking environment draws headlines, particularly in an election year, they have not been major capital market drivers. Investors appear more focused on Fed policy and economic data.
“We had much better economic growth than many expected in 2023, and that may continue in 2024, depending in part on how well the labor market holds up,” says Haworth. Markets appear to be increasingly focused on whether and when the Fed will begin lowering interest rates, with the expectation that such a move could improve the investment environment. The state of the economy will likely be a critical talking point as the election approaches.
A changing legislative landscape
President Biden, backed by a Democrat-controlled Congress, successfully passed a number of legislative initiatives in his first two years in office. The midterm elections in 2022 changed the legislative landscape. While Democrats maintained narrow control of the Senate, Republicans won a slim majority in the House. “With power split between two parties, there’s little that’s expected to happen in the way of legislative initiatives before the November election,” says Kevin McMillan, head of state and federal government relations at U.S. Bank.
“The market is currently at a wait-and-see point when it comes to the 2024 election, seeking more clarity about the candidates, the possible election outcome and the potential economic and market ramifications,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
The power split may have exacerbated political polarization in Washington. Republicans and Democrats battled over extending the authority of the U.S. Treasury to issue additional debt to fund the government, an issue that was resolved on the eve of a government shutdown in June 2023. However, contentious negotiations over the 2024 budget (the 2024 fiscal year began in October 2023) again raised the specter of government shutdowns. While temporary funding measures kept the government operating into early 2024, coming to a long-term funding agreement to last through the fiscal 2024 budget year proved challenging.
Haworth is skeptical that continued partisan differences in Washington will have a major impact on markets. There may be increasing interest in the election, with President Biden facing what is likely a challenging battle for a second term. Leadership of the House and Senate are also at stake on the November ballot. “The market is currently at a wait-and-see point about the 2024 elections, seeking more clarity about the candidates, the possible election outcome and the potential economic and market ramifications,” says Haworth.
Positioning portfolios today
It’s important to note that several factors contribute to market performance, and it’s not strictly a reflection of the individuals who wield power in Washington or the outcome of any given election. Investors are best served by maintaining a broader perspective.
Depending on one’s goals and time horizon, today’s investor might consider:
- A neutral allocation across fixed income, equities and real assets. The risk-reward dynamic has improved, highlighted by resilient consumers, a healthy labor market and stabilized corporate profits.
- Within fixed income portfolios, tax-aware investors may wish to consider a modest allocation to high-yield municipal bonds. For non-taxable portfolios, consider ways to enhance income with positions in collateralized loan obligations or non-agency residential mortgage backed securities.
- Investors seeking to manage total portfolio duration may consider longer-maturity U.S. Treasury securities, although rates have declined from peak levels in October 2023, making long-term bonds modestly less attractive than they were at that time.
Regardless of how events play out during the 2024 election cycle, a sound investment strategy is to focus on a properly diversified portfolio that is attuned to your goals, time horizon and risk appetite.
Have questions about the economy, capital markets or your finances? Your U.S. Bank Wealth Management team is here to help.
Frequently asked questions
The U.S. economy has maintained positive growth through the first three years of President Biden’s term. The economy, as measured by Gross Domestic Product (GDP), and reported by the U.S. Bureau of Economic Analysis, grew by 5.8% in 2021, 1.9% in 2022 and 2.5% in 2023. Beginning in 2021, an inflation surge raised economic concerns for many Americans. Living costs, as measured by the Consumer Price Index reported by the U.S. Bureau of Labor Statistics, rose 7.0% in 2021 and 6.5% in 2022 before moderating to 3.4% in 2023. Keep in mind that many factors beyond the policies of the President or other lawmakers, have a bearing on the state of the economy.
It’s important to note that many factors affect the economy, though policies put forth by the President may have been one of those factors. In the first two years of his term, President Biden pushed through a number of major initiatives, including an infrastructure spending plan and the Inflation Reduction Act, which included incentives for green energy projects. “Spending programs that passed in the first two years of the Biden administration had some influence on the rate of economic growth in 2023,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. However, many other factors, such as strong consumer spending, likely had a more significant impact.
Over the course of President Biden’s term, the U.S. stock market experienced whipsaw-like volatility. The benchmark S&P 500 generated impressive returns of 28.7% in 2021 and 26.29% in 2023. Sandwiched in between was a bear market, as the S&P 500, at its low point, lost 25% of its value in 2022, according to S&P Dow Jones Indices. The market in 2021 benefited from the U.S. economy growing at its fastest pace since 1984. However, rising inflation and the Federal Reserve’s (Fed) aggressive response to it, took a toll on stocks in 2022. 2023’s stock market recovery was narrower in nature, driven primarily by a small group of S&P 500 sectors dominated by technology-oriented stocks. In the opening weeks of 2024, the S&P 500 reached new all-time highs, closing over the 5,000 mark for the first time.
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