How to Customize Scenario Analysis of Your Investment Portfolio Leading up to the U.S. Presidential Election

To provide you with more recent observations while still using the same election outcomes from the past 20 years, our sample scenario analysis has now been run as of Oct. 15, 2024. (Our original analysis was as of Nov. 30, 2023.) The illustrative charts for broad U.S. index returns in large caps, small caps, Treasuries, investment grade bonds, and high yield bonds reflect the updated timing. FactSet clients can still access the base hypothetical scenarios among the full list of scenarios in PA stress test reports in FactSet Portfolio Analysis. They are listed in Thematic Stress Tests > U.S. Elections 2024. 

We heard from a number of clients after our previous article about the volatility trends of stocks and bonds before, during, and after U.S. presidential elections. They expressed interest in testing the impact of hypothetical election outcomes on their specific investment strategies, primarily to:

• Analyze specific funds or portfolios according to their custom investment goals

• Build over the base scenarios and incorporate their speculations on particular impacts across major asset classes such as equities, fixed income, and commodities

To provide that capability in the Workstation, we used historical observations to set up hypothetical scenarios as a base for interested clients. Each scenario provides average major asset class index returns for one week or one month after the presidential elections between 1992 and 2020, a solid number of historical observations on which to base scenario returns.

Clients can access the base hypothetical scenarios among the full list of scenarios in PA stress test reports in FactSet Portfolio Analysis. They are listed in Thematic Stress Tests > U.S. Elections 2024.

As a first step, we group the election outcomes from the past 25 years based on which political party won the presidential spot and had the majority in the Senate and House of Representatives. There are a few repetitive observations, where both the presidential and Congressional majority belong to the same party—in addition to a few combinations with split majorities.

Scenario Returns

For the base scenarios, we selected two horizons to observe the returns:

• One week after a presidential election provides more short-term market response to the outcome

• One month after a presidential election allows more time and information to pile up in market returns

For scenarios with more than one historical observation of the party combination between president and Congress, we took the average return of the selected factors from all years of election with this outcome.

This way, we define the following scenarios with one week and one month returns, based on the above:

• Average return after U.S. presidential election

• Democrat president and Congress

• Republican president and Congress

• Democrat president and Congress split

• Republican president and Congress split

• Democrat president and Republican Congress

Selected Factors

We selected a set of factors to serve as predictors for all other factor returns. We defined the return of those factors, as described in the previous section, and allowed the rest of risk model factor returns to be calculated conditionally on the hypothetical returns. We defined those as composite scenarios in FactSet Portfolio Analysis, as they allow adding more than one factor to shock.

The following main markets are included as predictors:

• Large and small cap broad indices to capture the aspects of both groups of stocks

• Treasuries, investment grade, and high yield broad bond indices to account for the specifics of each of the fixed income asset groups

• Gold and crude oil spot indices as representatives of commodities market response

Sample Analysis, Using Base Scenarios 

The following charts serve as examples from running the scenarios, which you could easily perform with your specific investment portfolios. You can also elaborate your views by adding subjective views on the possible market impact from the same or additional factors after copying and editing the stress test scenario.

When analyzing the following chart results, which are for illustrative purposes, keep the following in mind:

Macroeconomic and financial factors impact the returns of the selected factors on the observed dates. They do not show pure impact from presidential election outcomes. For example, the 2008 recession led to large negative returns on all observed markets for a much longer period than the presidential election snapshot from this material. The intention is to merely use these scenarios as a base for you to build up subjective assumptions or incorporate specific expectations on top of the historically observed returns.

Average results show more moderate responses, as they are based on a few observations. This is most obvious when using all election dates to compare the average return to the rest of the scenarios’ results. However, this also applies to the two scenarios, which are based on more than one historical observation: Democrat president and Congress and Republican president and Congress.

The limitation of using historical observations to define hypothetical scenarios is that some scenarios are unique and do not repeat, even looking back to 1960, so they could be based on single observations only—for example, Democrat president and Congress split, as well as Democrat president and Republican Congress.

The following five charts reflect our Oct. 15, 2024, analysis. 

Concluding Thoughts

The hypothetical scenarios presented in this article may serve as a base for more detailed and customized analysis of broad index responses or investment portfolios to U.S. presidential election outcomes. While they are based on historical observations only, they allow for adding subjective views on market responses on the presented or newly added factors in composite scenarios in FactSet Portfolio Analysis. This flexibility enables analysts to tailor their research to the specific investment strategy or future expectations and speculations.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.