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The Uncertainty Factor: Presidential Election Volatility

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April 12, 2016
Ballot box: A historical look at volatility leading up to presidential elections. What will 2016 hold?

There’s no doubt that this year’s presidential election is one for the history books. Who knows what’s going to happen this summer leading up to party conventions and the election in November?

Here at The Ticker Tape, we started thinking about the presidential election late last year. Kira Brecht wrote an insightful series of articles on the so-called presidential cycle and how certain sectors of the market might react if Democrats or Republicans win the White House this year.

For a higher-level, macro view, it might be beneficial to examine the history of markets leading up to two presidential elections from the past: 2000 and 2008. These two are of special interest because both involved candidates who were vying to take over for presidents who served two full terms.

2000 Presidential Election

Back in 2000, George Bush and Al Gore secured nominations on Super Tuesday, March 7. Although the nomination process was completed early in the year, markets were volatile from Super Tuesday through the election on November 7.

You can see the volatility in figure 1, which shows weekly charts spanning all of 2000. The top chart is the S&P 500 (SPX) and the bottom chart is the CBOE Volatility Index (VIX). 

S&P 500 and CBOE Volatility Index

FIGURE 1: S&P 500 (SPX) AND CBOE VOLATILITY INDEX (VIX) WEEKLY CHARTS FROM 2000.

Data source: NYSE, CBOE. Image source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

The spring and summer of 2000 marked the beginning of the end of the dot-com bubble. The Federal Reserve was hiking interest rates during this period. From January to June, the Fed funds rate was increased from 5.45% to 6.50%.

The VIX followed its typical seasonal pattern of dropping during the summer. By late August, the VIX found a bottom and then climbed going into the election. Volatility spiked the week of the election. But the VIX settled down the following week and remained elevated for the remainder of the year.

It’s important to remember that the U.S. economy officially slipped into a recession in March 2001. So the drop in the SPX and rise in VIX might have had more to do with the market discounting a recession than uncertainty surrounding the election.

2008 Presidential Election

The 2008 presidential election played out a bit differently from the election in 2000. On the Republican side, John McCain secured the nomination by March 2008. On the Democrat side, however, Barack Obama and Hillary Clinton battled for the nomination until June. The election was held on November 4.

Markets were moving during the nominations, as you can see in figure 2. The VIX traded in a range that was analogous to 2000—that is, up until September and October.

S&P 500 (SPX) and CBOE Volatility Index (VIX)

FIGURE 2: S&P 500 (SPX) AND CBOE VOLATILITY INDEX (VIX) WEEKLY CHARTS FROM 2008.

Data source: NYSE, CBOE. Image source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

The fall of 2008 marked the beginning of the financial crisis. The Federal Reserve slashed Fed funds from 4.0% in January to 0.40% shortly after the election in November.

The VIX exploded higher as the housing market imploded and the financial system came under extreme stress. Recall that companies involved with building homes, underwriting mortgages, and repackaging and selling mortgages were going out of business.

The U.S. economy had officially entered a recession earlier in the year, in January 2008. The economy emerged from recession after the election in June 2009.

It’s the Economy, Stupid

James Carville made this phrase famous while working on Bill Clinton’s campaign in 1992. “It’s the economy, stupid” seemed to also apply to the elections in 2000 and 2008. Despite all the drama, politicking, and noise surrounding these two presidential elections, in the end, the economy mattered most.

Maybe it was a coincidence that the U.S. economy entered recessions around the elections in 2000 and 2008. Or maybe there’s a link between the economic cycle and these two elections. Either way, it’ll be interesting this year to see if history repeats, or at least rhymes.

One way to follow along is by monitoring the VIX through the summer and heading into the election. The historical pattern from 2000 and 2008 saw the VIX slip into summer doldrums ahead of the elections. Then, the VIX spiked starting in September and leading right up to the November election. This year, deviations from this historical pattern—or adherence to it—might prove telling.

Follow volatility on thinkorswim

Track the CBOE Market Volatility Index (VIX) and other volatility measures in the TD Ameritrade thinkorswim® platform.

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