Investing amid the 2024 U.S. elections: What investors should know

Who wins the U.S. presidency can make the news, but legislative changes depend on Congress

The media likes to focus on the presidential race component of the elections. And each of the presidential candidates may have different visions for what they want to accomplish if they win. But it's important to remember that achieving their policy agendas will depend on cooperation from the U.S. Congress. After all, the legislative branch is responsible for drafting new legislation.

As of Jan. 10, 2024, polling site FiveThirtyEight suggests that 44.6% of Americans would support Republican candidates for Congress, and 43.5% would prefer Democratic candidates instead.² While polling is not necessarily a perfect predictor, the data suggests a high likelihood that neither party will garner a commanding majority in Congress. Given that many laws require a supermajority (3/5ths of voting members, or 60 senators out of 100 total) of support in the Senate, it will likely be difficult for new laws to pass without at least some members of Congress crossing the aisle and voting with the opposite party. Since Republicans and Democrats often have sharply divergent views, there will be a natural restraint on how bold the new legislation can be. Let's look at what this might mean for the markets in the year ahead.

Energy transition pace may be capped

In recent years, some Democrats have been advocating for fast-paced reforms to tackle climate change. Meanwhile, Republicans tend to prefer a more measured approach for dealing with the climate change-induced obstacles. With a congressional majority likely to be narrow by either party, the pace of energy transition would likely be slower. As my colleagues Paul Eitelman and Pierre Dongo-Soria explained in their Energy Transition Report, the energy transition process could inherently create some inflationary obstacles if done too quickly. Thus, the slower pace of energy transition could help keep inflationary pressures at bay, lending an important helping hand to the Federal Reserve (Fed) in its inflation fight.

Divided Congress could limit fiscal stimulus at the margins

We've noted that despite the relatively painless progress the Fed has made to date in bringing inflation back toward target, the risk of a U.S. recession is still above-average. In the event the economy slows into a recession, a more restrained Congress could mean that it would take a bit longer for fiscal stimulus to be injected into the economy.

However, it's important for investors to remember that in addition to fiscal policy, monetary policy can also be used to respond to a potential economic slowdown. The Fed would likely compensate for the restrained fiscal stimulus with a greater monetary policy response, thereby helping to keep overall risk somewhat contained.

Short-term volatility possible, but investors don't need to panic

Some investors may worry that divided congressional control could mean higher risks of government shutdowns. It is true that a divided government may be less likely to agree on a longer-term funding plan for the U.S. government. That said, we don't think that investors need to panic. Government shutdowns in the U.S. usually tend to be short-lived. And any market drawdowns that do result can actually be a useful tool in encouraging politicians to compromise and work together. While there may be volatility in the short-term, we still believe that investors who stay in the game will do all right in the medium to long term.

The bottom line

As the ballots get counted amid the various elections in the U.S. this year, some people will inevitably cheer, and some people may cry. But regardless of the outcome, we think investors should stay calm and disciplined.