As the highly contentious 2024 U.S. presidential election looms, investors may face challenges in the stock market. Historical data reveals that stocks tend to rally in the year before Election Day, with an average total return of around 10% based on data going back to 1928. However, the large-cap benchmark had already experienced a rally greater than 10% between early November and the end of last year, suggesting that the pre-election gains may have already occurred.

Razia Malik, a strategist at Nuveen, expressed concern about equities heading into 2024, citing the already achieved pre-election gains as one of the reasons. She also highlighted the likelihood of increased market volatility during election years and the discrepancy between investors' expectations of interest rate cuts and the Federal Reserve's likely actions.

Additionally, the stock market currently faces concerns over high valuations. The S&P 500 is trading at approximately a 20% premium compared to its average valuation since 2010. These factors contribute to the overall apprehension surrounding equities in the beginning of 2024.

Investors are also mindful of the highly contentious nature of the 2024 election. Former President Donald Trump leads the Republican primary as the front-runner for his party's nomination, aiming for a November rematch with President Joe Biden. Trump, currently campaigning amid several legal issues, denies wrongdoing and claims that the cases against him are politically motivated.

President Biden, on the other hand, faces low approval ratings, not only among Republicans but also among Democrats and Democrat-leaning independents. An ABC News poll revealed that 57% of Democrats and Democrat-leaning independents would be satisfied with Biden's nomination, while 72% of Republican-aligned adults would prefer Trump as their party's nominee.

The rising concerns over U.S. political dysfunction further contribute to the uncertain market outlook. Last year's federal debt-ceiling showdown and the subsequent removal of Kevin McCarthy as speaker of the House indicated a potential erosion of confidence in U.S. institutions and governance.

As the election draws nearer, the increasingly contentious political backdrop could lead to higher market volatility. Additionally, the possibility of a contested election outcome could drive this volatility even higher, as warned by Malik.

Presidential election years typically result in an influx of charts and tables analyzing historical market performance. One interesting observation made by John Lynch, chief investment officer at Comerica Wealth Management, is that stocks have never posted a yearly decline when an incumbent president, regardless of whether they win or lose, runs for re-election. This trend, spanning back to 1952, suggests that the performance of the stock market reflects the underlying economy and can be indicative of a candidate's prospects. Presidents who managed to avoid recession in the two years before their re-election ended up winning a second term.

Lynch also pointed out that the direction of the S&P 500 index has correlated with the outcome of the presidential election in 24 out of the 24 elections since 1928. If the index was positive in the three months leading up to the election, the incumbent or the candidate of the incumbent's party emerged victorious. However, there were four instances where the indicator was incorrect, with the index rising but the incumbent party's candidate still losing.

Despite the uncertainty surrounding the stock market, there have been positive signs. In 2023, U.S. stocks saw a strong rally, following the typical pattern of solid gains in the third year of a president's term. While equities consolidated at the beginning of the new year, they finished the previous week on a strong note, with the S&P 500 achieving its first record close in over two years.

Nuveen's Malik suggests playing defense amid the cyclical risk and politically inspired volatility. Focusing on stocks of dividend growers and global infrastructure plays may provide some resilience during market downturns. These strategies have historically weathered down markets relatively well.

Overall, as the 2024 presidential election approaches, investors should remain cautious and stay informed about the potential effects of political uncertainties on the stock market.