Election Market Volatility in 4 Charts |
Money & Markets Daily,
Questions abound for investors these days:
- Will the Federal Reserve cut rates? And if so, by how much?
- Will the market find its footing after a rough start to September?
- Is my portfolio diverse enough to withstand potential headwinds?
- Am I in a good position to take advantage of a resurgent bull market?
All are valid questions. Most aren't easy to answer.
But there's one issue that's at the back of investors' minds: the 2024 election cycle and what it means for the market. According to our recent poll, 75% of you aren't changing your investing strategy as November 5 approaches.
With the election ramping up, we'll be inundated with political advertising and mind-numbing media coverage for the next two months.
It's easy to get lost in all of the hubbub and headlines related to the cycle.
The important thing for you, the savvy investor, is to keep a clear head and not get lost in the weeds. But recent market volatility hasn't made that easy.
For me, the best thing is to examine what the data tells me. Get past the noise and discourse to find the facts.
Today, I'm going to take a historical look at how the market has performed during election years. While the data … like everything else … has limits, what it tells me is pretty clear.
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Presidential Election Returns Are Surprising
When thinking about elections, our perspective usually turns to whether a Republican or Democrat will win the White House.
In non-presidential cycles, that thought shifts to which party will control Congress.
For this exercise, since we don't know who will win in November, I'll look broadly at how the market performed no matter what.
Dating back to 1928, the average annual return of the S&P 500 during presidential election years was 11%.
Surprise No. 1: That is slightly lower than the average returns during non-presidential election years (11.6%) and all years combined (11.5%).
You might think the market ramps up during presidential election years because the policy positions of candidates become clear … giving direction to regulation and federal spending (two things that do impact the market).
But that hasn't been the case.
You could also rationally think that returns would be higher after the frenzy around the election has settled. Again, that's not the case…
The data concludes that S&P 500 returns were generally higher in the run-up to an election than after it. Returns after the first Tuesday of November were lower when there wasn't a presidential election than if there was one.
This tells me the market responds to the unknown of an election right before the votes are tallied.
Market Volatility and Election Years
One thing we have seen in the market in the last few months is higher volatility.
In the last year, the market has experienced blips of higher volatility, capped by a big spike in the CBOE Volatility Index (VIX) in August.
The index peaked at nearly 38 during the first week of August but has since pared back to around 19.5 today. But even August's peak is low… the VIX hit 65 at the height of the COVID pandemic in March 2020.
Data tells us that volatility in the market during presidential election years doesn't happen until closer to Election Day:
The average volatility — the standard deviation in daily returns — of the S&P 500 reached a high of 17.5% in the month prior to a presidential election.
Surprise No. 2: However, that volatility is actually higher in years when there isn't a presidential election.
The S&P 500 experiences less volatility before and after election years compared to similar periods without an election.
Incumbency Isn't Always An Advantage
The last data point relates to how the market performs relative to how the incumbent party does.
Currently, Democrats hold the White House and the Senate, while Republicans hold a slim majority in the House of Representatives.
So, what does the historical data tell if the party that holds the White House loses?
Surprise No. 3: In the time after an incumbent party wins the White House, the average returns of the S&P 500 are actually lower than if that party loses.
What It All Means: Historically, the big takeaway here is that volatility may be lower, but so are returns during presidential election years.
After the election, no matter who wins, the data suggests the market will go higher. But, how much remains the big question.
Here are a few things to keep in mind:
- Economic conditions now (think inflation, job growth and wage growth) are much different from those in previous elections.
- In addition to control of the White House, Democrats and Republicans are also vying for majorities in the House and Senate. A divided government is less likely to get major policies approved.
The important thing is to know your strategy and stick to the course, no matter how loud the election noise becomes.
Until next time,
Matt Clark, CMSA®
Chief Research Analyst, Money & Markets Daily
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