Will the Election Make the Stock Market Volatile?

One thing about 2020 is a given: The presidential contest will be a rollicking affair. So there’s a strong investor expectation that the political fray will bring stock market volatility.

Some 33% of investors expect “very substantial” volatility this year, owing to the campaign, according to a survey by Global Atlantic Financial Group. Also, Mitch Zacks, senior portfolio manager at Zacks Investment Management, looks for politically inspired “bumpiness” in the market this year, which he thinks will nevertheless end up with positive returns.

In his firm’s latest report, Zacks warned of possible election-linked civil unrest, contested results, and foreign interference, which could rock the market. (Other factors, such as reduced buybacks, also could prompt volatility, he added.)

Given President Donald Trump’s pugnacious personality and the angry political split among the public, a spilling over into more volatility seems reasonable.

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The average historical score of the CBOE Volatility Index, or VIX, is roughly 15. Scores below 10 are considered low, and above 20, high.

Right now, volatility is quiet. On Friday, the index, also known as “the fear gauge,” finished at 13.7. Its highest point of the year thus far was 18.8 on Jan. 31, perhaps having more to do with the onset of the coronavirus than US politics.

Going back to 1990, which is when the VIX initially appeared, volatility in presidential election years has been in the tame mid-teens. The only two outlier years had more to do with economic events. The first was in 2000 (average: 23.2), marked by the dot-com stock rout that began in March, and 2008 (32.7), when the gathering unease throughout the year over sub-prime mortgages culminated that fall with the financial crisis.

On the whole, stocks have performed well in presidential years. According to data from the Dimensional Fund Advisors Matrix Book, the S&P 500 was negative in just four of the past 25 presidential election years. (The S&P’s predecessor index began in 1926, so the first election year in the list was 1928, when Herbert Hoover faced Al Smith.)

Volatility, of course, doesn’t always equate with a market downturn. The lack of it in recent years can be blamed in part for lackluster hedge fund performance. Hedge strategies often rest on taking advantage of price discrepancies when share prices are in turmoil.

And if the good equities track record in the quadrennial election years holds true, few investors will be complaining about volatility. “Election years have historically been good for stocks, and I think 2020 will be, too,” Zacks wrote in his report.