According to historical market data, U.S. financial markets tend to experience heightened volatility during presidential election years, particularly as the race between candidates intensifies. This is largely due to the uncertainty surrounding which policies will prevail once the election is over. Investors are generally cautious when market conditions are unpredictable, and the stock market often becomes more sensitive to political events. For example, in the months leading up to the 2016 U.S. presidential election, the stock market fluctuated in response to debates, polls and news surrounding the policies of the two main candidates.

The unpredictability of a major shift in policies, such as corporate taxes and international trade agreements, left investors wary of making significant financial commitments. In some instances, markets may react negatively to potential policy changes that could disrupt economic sectors. For instance, if a candidate campaigns on a platform of increased regulation or higher corporate taxes, industries such as energy or technology might see their stock prices dip in anticipation of future losses. On the other hand, if a candidate favors deregulation or tax cuts, markets may respond positively as investors anticipate an economic environment more favorable to business growth.

Based on research on economic behavior, businesses typically delay significant investments during election campaigns, preferring to wait for the outcome before committing to long-term strategies. The rationale behind this is straightforward: uncertainty about future policies can make it difficult to predict profitability and operational costs. For example, in the months leading up to the 2020 U.S. election, companies across various sectors adopted a “wait-and-see” approach, postponing investments in new projects, acquisitions or expansions. This hesitation is especially pronounced in industries that are highly regulated, such as healthcare and energy. If a candidate is running on a platform that includes major reforms—such as changes to healthcare policy or energy regulation—companies in those sectors may be reluctant to make large capital expenditures until they understand the regulatory environment they will face post-election. In 2012, for instance, the Affordable Care Act (ACA) was a major issue in the U.S. presidential election. Healthcare companies held off on investment decisions as they awaited clarity on whether the ACA would be upheld or repealed, depending on the election’s outcome.

Consumer confidence is another area that is affected by election campaigns. According to studies on consumer behavior, when political uncertainty is high, consumers tend to feel less confident about the future of the economy and their own financial well being. This lack of confidence can lead to reduced consumer spending, which, in turn, slows economic growth. For example, during the 2008 presidential campaign the global financial crisis heightened economic uncertainty, leading to a sharp decline in consumer confidence. Elections can affect consumer behavior in different ways depending on the political and economic context. In 2016, when the U.S. economy was relatively strong, the election had a more moderate impact on consumer confidence compared with the 2008 election, when the country was in the midst of a financial meltdown. Nevertheless, consumers still exhibited caution as many were unsure how the outcome of the election would influence issues such as job security, tax policy, and healthcare costs. This decline in consumer confidence can lead to lower retail sales and a slowdown in sectors that rely heavily on consumer spending, such as real estate and automotive sales. During election seasons, some consumers may delay large purchases, like homes or cars, until after the election when there is more clarity about the future political and economic landscape.

During election campaigns, candidates often make promises about increased government spending whether in the form of infrastructure projects, tax cuts, or social programs. According to political economists, election-year spending tends to increase as incumbents seek to bolster their standing among voters. In the U.S., fiscal stimulus measures, such as tax cuts or increased public spending, are sometimes passed in the run-up to an election to provide a temporary boost to the economy.

One prominent example is the 2020 election, where both major candidates supported various forms of economic stimulus to address the effects of the COVID-19 pandemic. In this case, the stimulus was largely focused on providing relief to businesses and individuals affected by lockdowns and economic disruptions. While the stimulus measures were primarily aimed at mitigating the economic fallout of the pandemic, the timing of these efforts—just months before the election—had a significant short-term impact on GDP growth and consumer spending. However, while such spending can provide a short-term boost, it often raises concerns about long-term fiscal sustainability. Increased government spending during an election year can lead to higher deficits and debt levels, which may prompt concerns among investors about inflation or future tax hikes. For instance, after the 2012 election, concerns about the U.S. fiscal cliff—a series of automatic tax increases and spending cuts—raised fears about the sustainability of government finances, creating market uncertainty.

The short-term effects of U.S. elections on the economy are profound, driven primarily by uncertainty over potential policy changes and their implications for businesses, investors, and consumers. Market volatility increases as investors react to shifting polling data and policy platforms, while businesses often delay investments until they gain clarity about the election outcome. Consumer confidence can also decline, leading to a temporary slowdown in economic growth. Additionally, election-year spending and fiscal stimulus measures may provide a short-term boost to the economy, though they can raise concerns about long-term fiscal sustainability.

About the author: Michael J. Paton is a portfolio manager at Tocqueville Asset Management L.P. He can be reached at 212-698-0800 or by email at [email protected].