We Projected Scenario Index Returns Before the U.S. Election. Were We Close to the Actual Returns?

Leading up to the U.S. presidential election, we projected major asset class index returns for both one week and one month reflecting historically observed returns after elections between 1992 and 2020. We set up hypothetical scenarios based on which political parties won the presidential spot and the majority representation in the Senate and House of Representatives in the last 20 years. 

So how did we do in the one-week time frame? We are pleased to report that our base analysis was right on target. 

Summary View of All Asset Classes

For the scenario of a Republican president and Congress, the following chart highlights how close our projected historical one-week returns—based on similar election outcome historical returns from 2004 and 2016—are in comparison to one week of actual index returns (November 5 – 12, 2024) in large caps, small caps, Treasuries, investment grade bonds, and high yield bonds. 

Following are summaries of each index, from highest to lowest actual one-week returns.

The US Small Cap Equity Index hypothetical scenario return (4.14%) and actual return (5.49%) reflect the implied favorable economic environment for small businesses with potentially lower corporate taxes, lower Fed rates, and a protectionist trade policy.

The US Large Cap Equity Index hypothetical scenario return (3.17%) and actual return (3.62%) similarly indicate those stocks could benefit from tax reductions, tariffs, and deregulation.

The US Treasuries Index hypothetical scenario return (-1.43%) and actual return (-0.83%) are related to the expectation for higher federal spending—leading to higher borrowing costs and raising interest rates—that could pressure bond prices downward.

The US Corporate Investment Grade Bond Index hypothetical scenario return (-1.32%) and actual return (-0.44%) reflect tightening of credit spreads, again related to the expectation for an increase in government spending and borrowing costs.

The US High Yield Bond Index return is the only market where we see opposite trajectories for the hypothetical scenario return (-0.13%) and the actual return (0.37%). This indicates that high-yield bond markets have changed since the previous Republican president and Congress in 2004 and 2016. Notably, high-yield markets in 2016 exhibited highly volatile behavior and market distress with material danger of defaults following the freeze on credit high-yield fund redemptions. The slightly positive actual return last week reflects that junk bonds have more exposure to an implied favorable domestic revenue and US economic environment due to a protectionist trade policy that is expected.

Conclusion 

The consistency of our hypothetical results compared to actual results solidifies the accuracy and usefulness of our overall approach to the stress-test analysis. Risk managers could consider this approach for future events when they want to test hypothetical outcomes and their impact on investment portfolios.

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