Election Volatility

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Election Volatility

The S&P 500 has moved +1% up or down on almost half (46%) of trading days so far this year. That’s our fundamental benchmark of how much investors “feel” volatility, as any one-day move greater than 1% to the upside or downside is more than 1 standard deviation from the S&P’s mean daily return. Q3 has been a quieter quarter than the first 2, however:

  • Q1 2020: 30 one percent days versus the Q1 average of 13 since 1958 (first full year of data).
  • Q2 2020: 38 one percent days compared to the Q2 average of 13.
  • Q3 2020: 9 one percent days so far this quarter versus the Q3 average of 13 with one month left to go.
  • 2020 YTD: 77 one percent days, surpassing the whole-year average of 53 over the last 6 decades. The annual record is 134 in 2008.

Bottom line: we continue to think that Q2 was the peak for one-percent days given aggressive fiscal and monetary policy responses to the COVID Crisis, and the cadence of Q3 thus far reflects that reality. Whenever there are +35 one percent days in a quarter, such as in Q2, history shows volatility typically abates and the S&P 500 registers positive returns over the next few quarters. There is typically one 1% day a week in normal times, which is now more along the lines of what we are seeing with 9 one percent days over the past 2 months; the S&P was also up 7.0% in August.

The balance of this year is not like most, however, with a US presidential election this November. So, will volatility continue to subside or will a national election spur more volatility? We looked at the number of one percent days for just Presidential election years going back to 1960:

  • In Q4 of a Presidential election year, there have been 12 one percent days on average, or two fewer 1% days than the average of 14 for all fourth quarters back to 1960. Excluding 2008, there have been an average of just 9 one percent days in Q4 of an election year.
  • In Q3 of an election year, there have been 11 one percent days, also below the average of 13 for all third quarters over the last 6 decades. Excluding 2008, there have been an average of only 9 one percent days in Q3 of an election year.
  • The record high for one percent days in Q4 of an election year is 50 in Q4 2008. Excluding that outlier, there were 30 in Q4 2000; 12 of those 1% days were between Election Day on November 7th through December 12th when the Supreme Court issued its ruling on Bush v. Gore. Therefore, volatility is tame under a normal election, but there is historical precedence for a pickup in one percent days during a contested election.

    The all-time low in one percent days for quarters with a US national election was 1 one percent day in Q4 1964 and Q4 1968.

    During the last Presidential election, there were just 4 one percent days in Q4 2016.

The upshot: economic shocks create heightened equity volatility, not usually national elections. In fact, fourth quarters with a US presidential election actual exhibit less volatility than average. 2020 could be different depending on if a second wave of COVID-19 materializes this fall, but history says the S&P 500 should have a calmer ride higher during the balance of this year as long as there is a smooth election process.