As U.S. elections approach, their impact on the S&P 500 has become a focal point for investors.
According to Wells Fargo, the period leading up to Election Day typically sees market weakness, with the S&P 500 averaging a negative 4.3% return during the two months before the election.
They explain that this pattern has been consistent over the last six presidential election cycles, with both small- and mid-cap indices showing similar declines.
Wells Fargo highlights that during these pre-election periods, defensive sectors such as Staples, Utilities, and Health Care have tended to outperform.
"Defensive sectors – Staples (+3.9%), Utilities (+3.4%), and Health Care (+2.3%) – have been the best relative seasonal performers," writes Wells Fargo.
In contrast, sectors like Real Estate and Information Technology have underperformed, with average relative returns of -3.5% and -3.0%, respectively.
Despite this pre-election weakness, Wells Fargo points out that strong returns and cyclical outperformance tend to follow the elections. This suggests that while caution is warranted in the run-up to Election Day, there could be opportunities for gains once the election uncertainty clears.
The bank explains that this election-related market behavior is occurring in a broader context where other factors, like the Federal Reserve's policies, also play a significant role.
Wells Fargo notes that with the September Fed easing appearing certain, attention has shifted back to the election's potential impact on the markets.
While the S&P 500 often struggles in the months leading up to U.S. elections, the period afterward typically brings a rebound, particularly for cyclical sectors, as election uncertainties are resolved.