Since we are officially in presidential debate season and the election draws nigh, we should revisit the impact of elections on the stock market.
If you are a regular reader of this blog, you already know how we feel about mixing partisan politics and investment decisions. The data shows that they can be a dangerous combination.
Statistics also show that as we get closer to the election volatility may pick up. This is not a prediction. I’m not into that. But we do need to be aware of the possibility.
Increased volatility is out of the norm for what we’ve experienced lately. On June 25th, Eddy Elfenbein noted, that “we haven’t had a 2% daily loss since February 2023.”1 Furthermore, while the S&P 500 experienced “77 daily drops of more than 0.75%” in 2022, the index “hasn’t closed lower by more than 0.75% in a single day for the last 38 trading sessions in a row.”2
Will it last?
Recently, Andrew Sarna pointed to Bank of America research that revealed that over the last century, volatility increases 25% between July and November of election years.3
Another thing to remember is that the election may not be the only factor at play during that time of year. As we head into fall, the stock market tends to get more volatile anyway. One Chartered Financial Analyst notes, “…excluding the 2000 and 2008 bear markets, the observed rise in volatility is more consistent with the historical pattern and negative seasonality typically seen during September and October.”4
The good news is that even with higher uncertainty going into the election and erratic equity movement that may surround it, stocks tend to be up not long after election results. One JP Morgan Global Investment Strategist wrote, “After polling results are announced and the uncertainty dissipates, stocks have tended to rally. Looking at 40 years of Election Days, stocks have been higher, on average, one year later.”5
Whether there is a substantial jump in stock market volatility or not, it’s almost certain that there will be political theatrics. Therefore, you will need to focus on your long-term financial goals more tightly than you do the noise in the news and your social media feeds. Given the glut of negative headlines algorithmically curated to get users to click, this will not be easy.
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Sources:
1. CWS - Market Review, June 25, 2024.
2. Ibid.
3. “Elections & Game 7”, June 24, 2024. Accessed online: Elections & Game 7🏒
4. Angelo Kourkafas over at Edward Jones on June 4, 2024. Accessed online: Elections and the markets: 4 lessons from the past
5. Shawn L. Snyder, Election year investing jitters? Considerations that could set you at ease. https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/ideas-and-insights/election-year-investing-jitters-considerations-that-could-set-you-at-ease