For stock markets in the United States, 2020 so far has been a very volatile one. From scaling record highs in January to nosediving to multi-year lows around March to staging a stunning recovery to hit fresh peaks around September this year — all of these have happened in just a span of 10 months. To give you a little perspective, the CBOE Volatility Index (VIX), which measures the volatility, or price fluctuations, in the US markets, hit as high as 83.55 on March 16, 2020, and was at its lowest this year on January 17, 2020 — 11.75.
The signing of a phase one agreement of the US-China trade deal had propelled the markets to all-time highs earlier this year, marking the first major positive development in the months-long trade war between the world’s two largest economies. But the rally was short-lived as concerns about COVID-19, its economic impact, uncertainty around the fresh stimulus, and a deterioration in relations between Beijing and Washington severely dragged Wall Street’s main indexes.
But a major event in focus for the markets is the upcoming US presidential elections. The country goes to polls on November 3 to choose between Republican Donald Trump, the current president, and Democrat candidate Joe Biden. Markets in a presidential election year usually do see a bit of volatility given the clash of ideologies between the two parties and their resultant impact on the US economy, and this year’s volatile behaviour has only been compounded by issues surrounding the way the coronavirus crisis was handled.
Beating the Recession
While the markets don’t influence the election outcome, the economic situation prevalent in the country does tend to move the markets. Add to that the heated political race in the run-up to the voting day and you have the perfect recipe for a volatile market behaviour.
Take the instance of this research by Dan Clifton of Strategas Research Partners as quoted by Forbes. The report cites Clifton saying that history shows that a key indicator for a re-election of the sitting president usually happens if a recession is avoided in the two years leading up to an election.
In fact, in the last hundred years, only one president, Calvin Coolidge, was re-elected when there was a recession in the two years leading up to the election.
Volatility: The Name of the Game
Stock markets this year have also had a volatile run so far. Take a look at this volatility chart, for instance. It has been a year loaded with events that has moved the market and it has reflected in the CBOE Volatility index (VIX).
The hotly contested election this year heated up further following debates around Trump’s handling of the coronavirus crisis, the fight for big stimulus packages, and the social and political unrest around the Black Lives Matter protests. Between August and October 15, the markets have given widely opposing returns.
In 2016 too, in the run-up to the polls, apart from volatility, returns from the markets were mixed, with NASDAQ’s positive return outweighing other major indexes in some of the months.
While the jury is still out on the favourite to win the election this year, with a close call around the results likely to retain the volatility, six-month data in the run-up to the polls from the previous seven election years have shown upbeat returns.
According to a CNBC report, the average return on the S&P 500 is 3.99% and the Dow 2.64%. Interestingly, the S&P has traded positive in each of the six-month period before a presidential election except 2008. The 2008 financial crisis makes it an outlier in terms of returns for the market, strictly because of the extent of the damage to the markets because of the turmoil. Politics had a lesser role, compared with the financial crisis, to play on the markets.
With both the candidates continuing with their relentless campaigns, all eyes are on November 3 for the result that would help ease the uncertainty and the volatility that has gripped the markets in the past few weeks.