Election Uncertainty and Market Volatility: What to Expect in the 100 Days Before the Vote
As the 2024 presidential election draws closer, investors are grappling with the potential impact of political uncertainty on the market. While history suggests that the S&P 500 often sees upward movement in the 100 days leading up to the election, a closer look reveals a more nuanced picture. Despite a typical average return of 4.4% over the past 24 presidential elections, the road to Election Day can be bumpy. With the CBOE Volatility Index (VIX), often referred to as the "fear gauge," typically climbing in the weeks leading up to the vote, investors face a period of heightened volatility.
Key Takeaways:
- The S&P 500 typically rises in the 100 days before a presidential election, with an average return of 4.4%. However, this upward trend does not mean smooth sailing.
- The VIX tends to rise as the election approaches, indicating increased market uncertainty.
- The dollar, oil prices, and bond yields often exhibit specific patterns depending on the party in power.
- Gold and copper prices demonstrate distinct trends around the election, influenced by the incumbent president’s party.
The 100-Day Countdown: A Look at Market History
While the overall market trend in the 100 days before an election is typically positive, specific asset classes and economic indicators often show distinct patterns:
Volatility Rises:
The VIX serves as a crucial indicator of market sentiment. Historically, it tends to decline in the first 20 trading days of the 100-day period but generally shows a steeper rise in the 45-, 60-, 65-, and 70 days before Election Day. This suggests increased volatility and investor anxiety as the election draws closer.
Dollar Strength:
The ICE U.S. Dollar Index (DXY) usually trends upward in the months leading up to an election. Historically, it has reached its peak roughly 10 days before the election, showing an average gain of 2.8%. Over the entire 100-day period, the dollar typically sees an average increase of around 2.5%.
Oil Prices: Election-Year Patterns
Oil prices are known for their volatility, but they often exhibit specific trends around presidential elections. Typically, oil prices tend to rise throughout October, before potentially experiencing some weakness in the final weeks prior to the vote. Interestingly, when a Democrat is the incumbent president, oil prices tend to see a more pronounced boost in the lead-up to October. This could be linked to investor expectations surrounding policy changes or global economic conditions.
Bond Yields: The Impact of Party Affiliation
The U.S. 10-year yield typically trades in a range during election season. However, it is often more likely to be higher with a Democrat in office. This suggests that investors anticipate a more active fiscal policy and potentially higher inflation under a Democratic administration.
Gold and Copper: In the Shadow of the Incumbent
Gold prices generally see some stability leading up to an election. However, there’s a noticeable spike in September, particularly when a Democrat is the incumbent president. This could be attributed to investors seeking a safe haven as election uncertainty increases or anticipation of potential policy changes.
Copper prices tend to trade sideways before potentially dipping in the final weeks leading up to the election. However, the likelihood of a decline is lower under a Democratic administration compared to a Republican one.
European Markets: A Glimpse Across the Atlantic
Looking beyond U.S. shores, German government bund yields typically trend downwards in the 100 days before a U.S. election. However, they tend to be relatively stable when a Democrat is in office. This suggests that, during this period, the German bond market may be more sensitive to international events and less influenced by domestic US political dynamics.
Navigating the Election Cycle: Strategies for Investors
The potential for market volatility around elections underscores the importance of planning and diversification. Here are some key strategies for investors navigating the upcoming election season:
- Diversify Portfolio: Allocate assets across different asset classes, including stocks, bonds, real estate, and commodities. This can help to mitigate the impact of potential market fluctuations stemming from political uncertainty.
- Maintain a Long-Term Perspective: Resist the urge to make impulsive investment decisions based on short-term market movements. Remember that past patterns are not always predictors of future outcomes.
- Stay Informed: Stay informed about economic and political developments that could affect market performance. Track key indicators like the VIX, the dollar index, and oil prices to understand market sentiment.
- Consult with a Financial Advisor: Seek guidance from a qualified financial professional to develop an investment strategy that aligns with your risk tolerance and financial goals.
The Road Ahead: Unpredictable but Navigable
While the 100 days leading up to the election may bring volatility, investors can navigate the market with a thoughtful approach. Understanding historical trends, staying informed, and maintaining a diversified portfolio can help to mitigate risks and position yourself for potential opportunities. With careful planning and a long-term perspective, investors can potentially ride out the uncertainty of the election cycle and achieve their financial goals.
