ELECTIONS AND THE STOCK MARKET

Historically, the impact of Presidential elections is short lived. 

So far, the markets have shown little reaction to any upcoming election uncertainties. Volatility typically increases in the run-up to election day but often diminishes quickly as investors refocus on the prevailing economic and market trends.

The preferred measure of stock market volatility is the VIX index.  The VIX uses data from the options markets looking out about 30 days.  When the VIX rises, it is usually a negative indicator for stocks.  When the VIX declines, it is usually a bullish indicator for stocks. 

Here is a chart showing how the VIX behaves leading up to and following Presidential elections.  Notice the sharp runup in the VIX prior to the election and the rapid decline immediately after the election.

So there is a short period of volatility and uncertainty but things quickly return to normal.  This is because markets have historically performed well under administrations from both political parties. A divided Congress will curtail the potential for extreme policy implementations, allowing the markets to draw guidance from economic data and  corporate earnings. These factors have historically been the primary drivers of market performance.

Of greater importance, therefore, is how the market performs after November 5th. 

Markets have historically performed well post-elections, irrespective of political party.

• Over the past 80 years, the stock market has been positive in slightly more than half of the months leading up to presidential elections. More significantly, from the election through year-end, the market has been positive in all but three years. The most substantial post-election gains through year-end occurred in 1920, 1952, 1960, 2004, 1980, 1972, 2016, 1996, 1976, and 1992—spanning five Republican and five Democrat victories. This balance highlights that markets derive more consistent direction from broader fundamental conditions rather than the ruling political party. Therefore, investors should stay invested, as markets have generally thrived after elections.

In conclusion, the election will be a short-lived distraction from the most important market drivers – inflation, economic growth, the potential for a soft landing, etc. 

I do expect continued volatility post-election for several reasons:

• The broad stock market is overvalued by most measures.  My Market Value gauge suggests that the S&P 500 is overvalued by 14% as of the end of September.  We don’t base any of our trading on this indicator and nor should you.  But it is obviously more comfortable to be owning stocks when they are undervalued.

• A soft-landing has been priced into the stock market.  If the forecasts are wrong and the economy tips into a recession, the stock market will take a big hit. We have already seen the market overreact to inflation readings and the many statistics that track economic activity.

Since inflations seems to have cooled to a point where the Fed is comfortable reducing interest rates, the market is now hyper-focused on jobs reports and GDP data.  This week, we have some important readings on the manufacturing and services sectors.  Any surprises there will influence the markets. 

Stay Disciplined My Friends,

Phil

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