If there’s one thing recently lacking on Wall Street, it seems to be conviction. The S&P 500 has spent the first few weeks of October chopping around somewhat aimlessly and without any significant trends one way or the other. Some market watchers partially blame the pending elections for the lack of trading vigor. That is, with Election Day less than two weeks away, the uncertainty is serving as an overhang for the equities market. If so, can we expect a major change in volatility once the elections have passed? Let’s look at what happened in previous years and try to find out.
The recent action in the CBOE Volatility Index (VIX) seems to reflect the rather trendless market action lately as well. VIX is a measure of implied or expected volatility priced into a strip of short-term options on the S&P 500 Index (SPX) and tends to tick up when risk perceptions are on the rise. For instance, the spike to the mid-20s in late June, seen in figure 1, coincided with the frantic trading around the “Brexit” vote. The index is now well off those levels and has spent the past few months bouncing in a range between roughly 11 and 20. Through October 20, the index is up about 1 point, or 8%, month-to-date and at 14.34 with a little more than two weeks until Election Day.
Table 1 shows the readings from VIX during other election periods. For example, on November 8, 1988, the index was near 25. Importantly, the methodology used to compute the index has changed over the years, so we must be careful when drawing comparisons. Nevertheless, it’s interesting to note that the index, at its very recent levels, is low relative to previous periods. It was only lower in 1992 and 2008.
|Election Day||VIX||Two Weeks Before||Two Weeks After|
|November 8, 1988||24.73||21.00||19.54|
|November 3, 1992||11.74||11.61||15.11|
|November 5, 1996||17.65||16.4||15.23|
|November 7, 2000||24.91||24.28||26.62|
|November 2, 2004||16.18||15.13||13.21|
|November 4, 2008||13.08||14.53||11.12|
|November 6, 2012||17.58||17.06||15.08|
TABLE 1: CBOE VOLATILITY INDEX BEFORE AND AFTER ELECTIONS. The CBOE Volatility Index typically ticks lower after an election has passed. Data source: CBOE. Chart source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
The table also shows the readings of the volatility index two weeks before the election and two weeks after. If the elections serve as an overhang over the market, as some market pundits claim, the volatility index might be expected to increase in the two weeks ahead of the election and then fall in the two weeks after the event risk has passed.
That pattern held in 1988. On November 8, George H.W. Bush won a landslide victory against Michael Dukakis, and VIX was approaching 25 at the time. Two weeks before, the index was at 21. Two weeks later, it dipped below 20.
In 1992, Bill Clinton became a first-term president after capturing many electoral votes. VIX was below 12 on Election Day, but moved up near 15 in the two weeks that followed.
Clinton won reelection in 1996. VIX was near 17.65 when the votes were tallied on November 5, having risen from 16.4 two weeks before. In the 10 trading days that followed, VIX dipped down to 15.23.
November 7, 2000, is best known for the tight and controversial race in Florida that eventually handed the presidency to George W. Bush. VIX was at 24.91 at that time and was up to 26.62 two weeks later.
In another close race, Bush won reelection against John Kerry. VIX was at 16.18 on Election Day, November 2, 2004. That was up from 15.13 two weeks before. The day after the election, the index fell sharply to 14. Two weeks later, the index was near 13.
Before President Obama’s landslide victory on November 4, 2008, VIX was near 13 and well below levels seen two weeks before, but it continued to fall toward 11 through mid-November.
Finally, in 2012, Obama won reelection against Mitt Romney. VIX was at 17.58 and had risen modestly in the prior two weeks, but then fell to 15 just two weeks later.
Many factors can influence financial markets. Although elections are certainly one of those factors, it’s difficult to quantify how much they impact volatility. In looking at U.S presidential elections dating back to 1988, it does seem clear that VIX has fallen in the two weeks that follow the decision. But that could also be because the market’s focus soon turns to the holidays, which is often a seasonally slower and less volatile period for the U.S. equities market.
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