- With election day just over a month away, investors should expect increased volatility.
- However, volatility has historically subsided post-election day and returns have been solid.
- Three things to look for in the year ahead.
Will This Cycle Be Different?
As we enter October, the U.S. presidential election is just over a month away. In past presidential election cycles, the period leading up to election day has been fraught with stock market volatility, due mainly to the heightened sense of uncertainty.
However, the period after election day has been quite a different story, as Craig Fehr, head of investment strategy at Edward Jones, pointed out in recent commentary.
October in Presidential Election Years Is More Volatile
Stocks have historically performed well in presidential elections years. So far in 2024, through the first three quarters, the S&P 500 has been in bull market territory, up 20.8% year-to-date, while the Nasdaq Composite has gained 21.2%.
This is significantly better than recent presidential election years, as the S&P 500 gained 16.3% in 2020, 9.5% in 2016, and 13.4% in 2012.
While there was a considerable amount of volatility in August and September of this year, the markets still enjoyed robust gains, with the S&P 500 rising 5.5% in Q3 and the Nasdaq gaining 8.2% this past quarter.
Even in the month of September, typically one of the most volatile months on the calendar, the S&P 500 gained 2% and the Nasdaq rose 2.7%.
However, October of presidential election years has typically been more volatile, as Edward Jones’ investment strategist Craig Fehr wrote in recent commentary. Going back 80 years, the stock market has been positive in the month leading up to presidential election day in slightly more than half of the years, wrote Fehr.
Further, the CBOE Volatility Index, or VIX, has steadily increased as election day approaches. Excluding recession years, wrote Fehr, the VIX has risen from an average of about 16 roughly a month out from the presidential election to an average of almost 22 on election day.
Why? As Fehr put it, markets hate uncertainty, and uncertainty increases the closer election day draws near. This year has been no different, as the VIX was at about 16 on September 27, and just a few days later, as if on cue, it is up over 19.
“This election poses uncertainty, and markets hate uncertainty,” wrote Fehr. “However, that election volatility is more reflective of the market repricing potential new policy proposals, instead of an implication that the election outcome represents a win-or-lose scenario.”
Post-Election Returns Have Been Solid
As quickly as volatility rises leading up to election day, it drops after it. Historically, the VIX has plummeted after election day from 22 to below 16 after about a week. After around 30 days the VIX is at around 15.
“We think this demonstrates that once election uncertainties are replaced by a clearer policy outlook (regardless of which political party will be setting those policies), the market typically refocuses back on the prevailing conditions,” Fehr wrote. “The potential for a divided Congress limits the likelihood that any extreme policies from either Harris or Trump would be implemented. We suspect this is, in part, why markets have not overreacted to campaign proposals to this point.”
However, Fehr does state that the post-election volatility could extend if there is a contested election and the results drag out.
But from election day through year-end, markets have historically been strong. Going back to 1945, the market was positive after the election until the end of the year in all but three presidential election years. And stock markets have gained more than 10%, on average, one year out from the election.
Three Trends to Look For
Of course, there is no guarantee that this cycle will fall in line with past cycles, but Fehr points out that long-term performance is more about fundamentals than the occupant of the Oval Office.
That said, Fehr and his team are focused on three trends: an economy that is growing a decent, albeit slower pace, but won’t go into recession; a Federal Reserve that is easing policy with additional cuts likely in the coming year; and accelerating corporate earnings that should help validate rising valuations and stock prices and broaden out the bull market.