As the 2024 election season unfolds, understanding the dynamics of the “election bump” becomes crucial for real estate investors. This phenomenon, characterized by a temporary surge in economic or market activity surrounding elections, can have significant effects. In this
blog post, we explore the intricacies of the election bump, drawing from historical patterns and analyzing the current macroeconomic environment.
Elections have always been periods of heightened market volatility. The term “election bump” describes this temporary surge, which can influence various economic indicators. This blog post delves into the election bump and examines other election-related impacts on the macroeconomic landscape.
The election bump is a notable increase in economic activity around election periods. Historically, this bump manifests in sectors such as the stock market and consumer confidence. For instance, businesses may increase investment in anticipation of favorable policy changes and consumer confidence might increase due to the anticipation of lower taxes.
Stock Market Trends: Election periods often bring heightened volatility to the stock market. Investors react to the uncertainty of election outcomes, and market indices can see significant swings. For example, the 2020 U.S. presidential election saw considerable market fluctuations leading up to and following election day. During the 2016 election, the “Trump bump” occurred as markets reacted positively to expectations of pro-business policies. Post-election, markets generally stabilize as investors adjust to the new political landscape.
Business Investments: Businesses tend to be cautious with investments during election years due to uncertainty around policy changes. The expectation of regulatory shifts can either delay or expedite investment decisions. In 2024, it appears that businesses will remain vigilant, closely monitoring potential changes in fiscal and regulatory policies.
Consumer Confidence: Consumer sentiment typically experiences a boost during election years due to heightened political engagement and the anticipation of policy changes. However, prolonged periods of high inflation, as seen in recent years, can dampen this confidence. Although inflation is expected to moderate into the latter half of 2024, its lingering effects continue to weigh on consumer sentiment.
Fiscal Policies: Fiscal policies, including tax reforms and government spending, significantly impact the economy. As of June 2024, most economic observers expect the Federal Reserve to maintain its current policy rates, with potential rate cuts in the latter half of the year if inflation moderates further. This monetary stance aims to navigate the economy towards a soft landing, balancing growth and inflation.
Regulatory Changes: Elections often lead to shifts in regulatory landscapes, particularly in key sectors such as finance, real estate, and taxes. Investors and businesses must stay agile, adapting to new regulations that can affect operational costs and market opportunities. The anticipated regulatory changes in 2024 will likely focus on taxes, housing policies, and financial regulations, driven by ongoing debates around economic inequality and market stability.
Stock Market: The stock market experienced a significant positive reaction, often referred to as the “Trump bump.” Investors were optimistic about anticipated tax cuts, deregulation, and infrastructure spending, leading to a sharp increase in major indices such as the Dow Jones Industrial Average.
Business Investment: Businesses responded positively to Trump’s pro-business stance. Anticipation of corporate tax cuts and deregulation fueled increased business investments, particularly in the energy, finance, and manufacturing sectors.
Stock Market: Following Biden’s victory, the stock market also experienced positive movement, driven mainly by the prospect of substantial fiscal stimulus aimed at economic recovery amid the COVID-19 pandemic.
Business Investment: Business investment trends were mixed following Biden’s election. While sectors like renewable energy anticipated favorable policies, concerns about potential increased regulations and higher corporate taxes led to a more cautious stance.
In the scenarios below, we assume that inflation has decreased sufficiently to allow the Federal Reserve to lower the federal funds rate by the November election and the winning presidential party gains control of congress.
A Republican victory would likely amplify pro-business economic effects.
Implications:
Summary: A Republican victory, alongside a lower federal funds rate, could drive significant economic growth. While Treasury yields might rise, the narrowing spread between Treasury yields and mortgage rates would likely offset this increase, benefiting both commercial and residential real estate markets.
A Democratic victory would likely create a dynamic of increased regulation on business and investors.
Implications:
Summary: A Democratic victory with a lower federal funds rate could lead to lower Treasury yields and mortgage rates, potentially benefiting residential real estate through improved affordability, while commercial real estate would likely face challenges from increased regulatory compliance.
These scenarios illustrate potential market reactions following the election. However, it’s crucial to understand that they represent a simplified breakdown of policies and potential market responses. A multitude of other economic fundamentals and political outcomes can interplay with
these scenarios, potentially altering the conclusions. Furthermore, the duration and persistence of the market’s reaction can vary considerably. Certain administrations may experience a sustained impact on markets and economic indicators, while others may witness only temporary effects.
