Election Year Market Conditions & The Rise of Secondary Transactions
By: Ayush Dave, Senior Venture Analyst
As we navigate the complexities of an election year, public markets are expected to experience a period of reduced liquidity and increased volatility. This scenario, while challenging for some, presents a unique opportunity for discerning investors to capitalize on the secondary market for private company shares.
Election years tend to bring about a sense of unpredictability in the financial markets. Stock market volatility is much higher in the months leading up to a presidential election. This heightened volatility often leads to decreased liquidity in public markets as investors adopt a more cautious stance. 2024 has been no exception. Charles Schwab has identified elections as a top risk for investors, predicting a resurgence of volatility following decades-low levels in U.S. and European markets, as noted in their 2024 and Mid-Year Outlooks. For instance, volatility spiked following French President Macron’s decision to call for a snap election—a sudden, unexpected election that can be called by a leader or government before the regular schedule—at the end of June.1
This election year is particularly unique, with more than 2 billion voters going to the polls in 50 countries.2 The United States, India, Europe, Mexico, and many other countries are all holding elections. Within the U.S., unpredictability is heightened due to a tight anticipated vote, with both parties taking opposite sides on topics such as international tariffs, domestic taxes, renewable energy development, and more. Investors are closely watching how elected officials will influence both domestic economic policies and foreign relations, as these decisions can significantly impact financial markets by affecting interest rates, trade agreements, regulatory environments, and overall investor confidence.
Analysts with U.S. Bank found that the stock market’s performance has been relatively “muted” in the 12 months leading up to the election, based on performance during past election cycles.3 According to an analysis by LPL Financial, which includes data from the S&P 500’s precursor index, the average gain for the S&P 500 during U.S. presidential election years has been in the range of 6-7%. While a 7% gain isn’t catastrophic, it falls significantly short of the 16.8% average gain observed in the year preceding an election year. Moreover, it is below the approximately 10% average annual total return typically seen in the U.S. stock market during non-election years.4This effect of lower returns in the months surrounding an election holds true for both the equities markets and the bond markets.
As public market liquidity tightens, many investors and current shareholders in private companies are seeking alternative avenues for liquidity, leading to an increase in the supply of secondary shares. The private secondary market has seen significant growth. As the private markets grew from around $2 trillion to $10 trillion between 2010 and 2022, secondary market transactions increased from $20 billion to well over $100 billion annually, according to Jefferies.5 The value of secondary transactions may very well triple over the next seven years, from $114 billion in 2023 to $417 billion in 2030, suggesting ample opportunities for investors.6 This trend is expected to continue for the remainder of 2024. While secondary transactions are less influenced by short-term political uncertainties compared to public markets, instability in public markets often results in valuation discounts in the secondary market, allowing secondary shares to be potentially purchased at a 30-50% discount.
The current lack of liquidity in public markets, driven by election year uncertainty, makes it an opportune time to invest in the secondary market. These investments offer reduced risk, potential discounts, and access to established companies. By leveraging the advantages of the secondary market, investors can navigate the volatility of public markets and secure more stable and promising returns.