The Impact of Election Uncertainty on the Economy

With the 2024 election getting closer, there’s been increasing economic uncertainty following President Biden’s announcement regarding his drop from the race and the Democrats gathering around Vice President Kamala Harris as their potential candidate. This has led to market instability and aroused much worry and concern about how this election uncertainty will affect the economy.

Personally, I think election uncertainty can definitely hurt investment, household expenditure and the stock market; however, this effect is often temporary, as the economy tends to rebound after the election and new policies are implemented. Also, instead of treating election uncertainty as a threat, we can see it as an opportunity for positive changes and promoting economic growth.

Election uncertainty is nothing new to us. When there are policy or leadership changes, the market will react accordingly. For instance, the market has been getting pretty unstable after Biden’s decision to quit the 2024 presidential election. According to The Street, “The CBOE Group’s VIX index, the market’s benchmark volatility gauge, was last marked 3.7% higher at $16.52 following news of Biden’s withdrawal, near to the highest levels in six months.” This shows that election-related uncertainty can influence the economy and very likely in a negative way.

Election uncertainty can harm investment by lowering investors’ confidence and, thus, reducing economic stability. This means company owners and businessmen want to hold back by taking a more conservative approach like delaying spending and big projects and saving more. Thus, economic growth slows down because companies postpone making innovations that have great profits in the future.

Households, too, are more careful when facing election uncertainty. They might start to save more and spend less in an unclear situation. According to The Harvard Gazette, American households choosing to save more can greatly hurt the economy as consumption takes up around 70% of the GDP.

Foreign direct investment is also affected by election uncertainty. Investors want to seek stable markets where they are more likely to receive positive outcomes for their investment. When facing potential policy or leadership changes, however, foreign investors might change their minds and choose elsewhere. This means less capital flowing into the U.S. economy and fewer new job positions.

Besides, the stock market tends to get volatile because of election uncertainty. Studies show that “within the 51 days surrounding elections, stock market returns exhibit more than 20% higher volatility than anticipated.” As investors react to potential policy changes, stock prices change greatly, which makes the situation tough for buyers to get involved.

However, even if we know these arguments above make sense to some extent, it is important to consider election uncertainty in a broader context and how it will affect economic growth in the long run.

As a matter of fact, once the new leader comes to the stage and the unstable situation is controlled, the economy afterward often recovers. Take the 2016 presidential election as an example. With uncertainty about the policies of both candidates, the election showed strong market volatility—such as significant drops in futures prices. In spite of the situation, the post-election market became stable as the results came out and the share market performed better on the second day after the election.

Similarly, in spite of the unpredictable COVID-19 pandemic and the poor performance of the equity market during the pre-election period, the 2020 presidential election saw an economic rebound as new policies were announced and vaccines became broadly accessible. These pieces of evidence suggest that the effects of election-related uncertainty can be temporary instead of enduring.

Furthermore, it is worth noticing that some levels of election uncertainty can actually bring opportunities for necessary reforms to cope with long-lasting issues, which is helpful for long-term economic growth. For instance, the 1980 presidential election in the United States contributed to crucial tax reforms surrounded by uncertainty. This indicates that election-related uncertainty can lead to beneficial reforms which are good for the economy.

In a word, election uncertainty can only temporarily harm investment, household spending and the stock market, but fortunately, the economy is very likely to rebound in the long run. Election-related uncertainty can also lay the solid foundation for reforms and growth. This perspective brings a more balanced and optimistic attitude toward the relationship between elections and the economy.

Acknowledgment: The opinions expressed in this piece are those of the individual author.