Key Takeaways
- As November nears, anxiety and uncertainty often increase.
- Investors can strategically utilize this pattern by using their cash reserves to purchase stocks just prior to and right after election day.
During a U.S. presidential election year, investors often have questions about the potential impact on financial markets. In particular, they are interested in the volatility trends of stocks before and after elections.
The diagram below provides insights into these questions using historical data from recent presidential elections.
source: Edward Jones
While fundamental conditions primarily drive market performance, elections can impact short-term volatility. As November nears, anxiety and uncertainty often increase, which may account for the notable rise in market volatility—measured by the CBOE Volatility Index (VIX) in the two months leading up to election day. The VIX rises to a high of 27, twelve days prior to election day. This is one standard deviation above its long-term average of 20.
However, by 30 days after the election, volatility tends to decrease, returning to normal levels within 60 days post-election.
Investors can strategically utilize this pattern by using their cash reserves to purchase stocks just prior to and right after election day. While headlines and investor sentiment can affect short-term market volatility, fundamental factors drive long-term performance. In fact, over the past 40 years, there has been only one instance when market returns were negative 12 months after an election.