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Presidential Election: Markets Often Get Choppy Ahead of Votes

October 18, 2016
American flag: Could markets get choppy ahead of the presidential election on November 8?

When U.S. presidential campaigns heat up during the final stretch, investors often experience a bumpy ride.

That’s the lesson looking back at 20 years of historical volatility as tracked by CBOE’s VIX, the so-called “fear” index. During the October 1 to November 1 period leading into the last five presidential elections starting in 1996, VIX increased an average of 21%, according to CBOE data. Even stripping out 2008, which saw VIX rise an astonishing 53% in October as the financial crisis raged, there’s still an average 13% rise in the other four election years tracked. It’s obviously too soon to say what volatility will be in the full month of October this year, but perhaps investors got a sneak preview when VIX jumped 37% between September 1 and September 15 as election polls tightened after a sleepy summer.

"As the election hits a climax, we’ll see more volatility in the market and some bigger selling days,” said Jim Kelleher, director of research and senior analyst at Argus Research.

A higher risk of volatility means investors might want to carefully watch the markets and their investments, choose the right sectors to invest in, diversify, and make sure they’re properly positioned during what could be a choppy ride between now and November 8. Although past performance certainly cannot predict future performance, to potentially gain some perspective, it can be helpful to look back at history and see how the markets performed during the run-up to past elections. Fasten those seatbelts!

Parallels to Bush vs. Gore in 2000

The last time a presidential election approached with no incumbent candidate on the ballot and the world economy not gripped by an extreme financial crisis was in 2000, when George W. Bush and Al Gore were fighting to replace President Bill Clinton. In 2004 and 2012, unlike this year, an incumbent was up for reelection, and in 2008, the financial crisis took center stage in the weeks and months before the vote.

In 2000, the S&P 500 Index (SPX) hit a seasonal peak on September 1, then struggled throughout September and October as investors grappled with the same questions they’re having now about what a new president might mean for the markets. The SPX topped out at around 1520 during the first week of September 2000 before falling to 1366 by the week of the November election. That year was a rather strange one because the election didn’t immediately get decided. Gore and Bush fought over the results until mid-December, and the market continued to struggle. That contrasts with 1996, 2004, and 2012, when reelection of an incumbent president brought rallies soon after the election. Between October 1, 2000, and November 1, 2000, the VIX climbed 15%.

In early September this year, the VIX rose from around 12, an historically low level indicating lack of concern about possible downward moves in the market, to above 20 in just a few days. Some of the rise is seasonal, said David Settle, curriculum development manager at Investools®, who noted that the market typically gets choppier in the fall. But in an election like this one, the volatility is magnified because no one knows exactly how the new president and his or her policies might affect the economy.

“A Hillary Clinton presidency is something the market sees as status quo, with current policies continuing,” Settle said. “But the market views Trump as a wild card. It doesn’t know what to expect, and the market doesn’t like that. This increase in volatility is seasonal … just now we’re getting an increase and it happens to coincide with the election getting closer to the home stretch.”

Markets rose ahead of the elections in 1996 and 2004, but those were years with an incumbent on the ballot. “We don’t have that mooring this time,” Kelleher said. "There’s no pending reelection of a popular president, so the market may be at a higher risk.”

VIX rose 25% in October, 2004, but just 2% in October, 1996, ahead of an election that many political historians say was basically over weeks before the actual voting.

When there’s uncertainty ahead of an election, as there is now, the market often behaves in ways that reflect that.

“The market doesn’t like indecision; the market likes to know what will happen,” Settle said. "The more indecision, the more volatility starts to rise because participants take measures against the unknown by hedging, which raises the value of protection, which is usually put contracts. And when put prices go up, volatility goes up. When the unknown comes out, the market settles back down again.”

A put is an options contract that gives its owner the right to sell a stock at a specified price within a specified time. Options traders often buy puts when they expect share prices to fall.

Can Investors Prepare for the Weeks Ahead of November 8 Vote?

Robert Siuty, an investment consultant at TD Ameritrade, agreed that more volatility could be on the way between now and the election, and noted that this potential volatility comes at a time when the market’s bull run has surpassed seven years, an historically long trend. The combination of the long rally and the election makes it even more important for investors to make sure they’re properly diversified and that their portfolio risk is in alignment with their goals and needs.

“The main conversation I’ve been having with clients has been around, ‘Let’s take an overall look at your portfolio, how you’re invested and how you’re situated moving forward,'" Siuty said. “The market has had a strong run over the last several years, and it is important to continually reevaluate one’s situation to make sure that they are allocated appropriately and not taking on more risk than they should be.”

Siuty noted that despite all the current focus on the election, every year events occur in the world that are potentially market moving, and the best way investors can help shield themselves from these events to some extent is by controlling their risk and focusing on what their time horizon is for their investments, not days or weeks. “You want to put yourself in a situation where you can weather any storm and you do this by having the right financial plan in place,” he said. Siuty is stressing the need for proper diversification.

Keep Things in Perspective as Election Approaches

Taking the long-term perspective means understanding that the election is ultimately a blip in the grand scheme of things. After all, there aren’t too many people still looking back now at market performance during the Bush/Gore election and wishing they’d bought one stock instead of some other at that time. And the market even got through all the storms in 2008 to set new highs a few years later.

“Don’t navel-gaze too much at Washington, D.C., because drivers of performance have less to do with D.C. and more to do with financial concerns,” Kelleher advised.

Read more about the upcoming election and its implications:

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