How elections affect markets
Elections were held in many major countries this year, but none will draw as much attention as the 2024 US presidential election.
Although the actual election isn’t until November 5th, elections can start impacting markets much earlier. That’s because the election cycle begins long before November, and the stock market is well-priced for future events and returns.
In a typical election year, there are primary elections from January to May, during which each state votes for a candidate to represent the party in the election. Candidates then begin campaigning, often in September and October, before the debates take place. Finally, we will vote in early November.
Of course, this year has been far from normal!
The debate was held at an unusually early date in June. Then, in July, the top leadership of the Democratic Party changed, and Vice President Harris took office in place of President Biden.
And the first (and likely last) presidential debate between the incumbent candidates just took place, with the vice presidential debate still to come.
Voting will take place on Tuesday, November 5th.
Election uncertainty increases volatility (pre-election)
This will now look like this close As elections take place, we can expect volatility to increase.
If we measure stock price volatility with the VIX, we find that it rises nearly 45% between August and October in years near elections (graph below, red bars). Volatility then begins to decline as election results are usually known by early November.
Interestingly, during the election it’s not At the end (green bar), volatility remained roughly flat through the end of the year, reflecting market confidence in who will win.
However, if we look at non-election years, we see that some of this pattern is seasonal. In other years, volatility increases by about 15% from August to October (orange bars).
Figure 1: Close elections increase uncertainty and increase volatility in the lead-up to the election.
Certainty of elections increases transactions (post-election)
Interestingly, transactions have actually increased even more rear The election will be held as soon as the election results are known. This suggests that traders need to rebalance their portfolios to account for the likely sector and stock beneficiaries of more certain policy changes.
Still, the impact on trading volumes varies from election to election. In 2012, trading volume peaked at around 30% more than on election day (blue line). However, over the past two elections, trading volumes have been approximately 75% to 90% higher than election day (green and orange lines).
Figure 2: After election results are known, trading increases and investors rebalance their portfolios.
The surge in election trading is small compared to other major events
These are relatively large increases over a few days, but increases associated with elections tend to be smaller than other large events.
For example, over the past two presidential elections, activity, or volume and message traffic, increased between 58% and 76% (graph below, red bar).
This is about the same size as the response to the short-lived regional bank crisis in 2023 and the Fed’s decision to raise interest rates in early 2022 (orange bar). Despite an almost unexplained dip in February 2018, activity increased by a factor of two to three over the previous two elections.
Figure 3: Elections increase activity, but not as much as other major events
Of course, part of this difference comes down to the fact that, unlike elections, these other events are usually unexpected.
Election uncertainty tends to reduce returns
We have already shown that elections, especially close ones, increase volatility and trading activity. But they also impact the bottom line.
Close elections create uncertainty for investors and markets, as there is no certainty who will win or what rules or industries will change.
On average, in close elections (graph below, red line), the market looks like this:
- It will continue to sell until March, the heart of the primary season.
- It tends to be advantageous if the candidates are narrowed down to two.
- Things get even more volatile during debate season in September and October, when elections are in full swing, and stocks often fall again.
But once an election is decided, the market typically recovers until the end of the year, ending the year up almost 3%, no matter who wins.
By comparison, non-election years without the same level of political uncertainty show more consistent gains, increasing by about 9% per year (orange line).
Exhibit 4: In close elections, there is another drop during the primaries and just before the election.
However, what we have seen this year is far from normal (black line). Perhaps what this shows is that no matter what happens in an election year, macroeconomics matter.
Economy is more important than who wins.
…and that is historically true.
Republicans and Democrats may think it matters a lot to the market who wins. After all, their policies help shape how the economy will work going forward.
However, if you look at the total return of the stock market during each “presidential cycle” (the four years after the president takes office), election), we see no clear benefit to going from Republican (red bars) to Democratic (blue bars) or vice versa, or winning reelection (dark red and blue bars).
Rather, one clear trend is that economics matters a lot. In fact, the average total return for periods that overlap with recessions (gray arrow) is 30%, compared to 62% for periods that do not.
Figure 5: Recessions are a much bigger driver of presidential term gains than political party terms.
So what matters to markets is the economy more than who’s in the White House.
Elections are important for markets, but macro matters too
If history is any guide, we should prepare for increased volatility, increased activity, and potentially lower returns. At least for a short time this year.
But investors should also keep an eye on the global economy, as the data shows that macro matters. The expected soft landing and Fed rate cuts this year may be more important than who takes the White House in 2025.
Michael Normile, U.S. Economist at Nasdaq, contributed to this article.
