November 24, 2020
Even in the best of times, understanding markets can be a challenge. Add in the US presidential election and a difficult task becomes nigh on impossible. But perhaps history has some of the answers?
Link to data dashboard1 : https://infogram.com/us_election_dashboard-1h1749px9qoq6zj?live
Chart one: What happens to stock market volatility in an election year?
Using a data set reaching back to 1992 we considered the maximum and minimum range of the Vix Index2 60 days before and 60 days after a US Presidential election.3 We then calculated the median cumulative change over the same period (marked in red below) and the same for the 2020 election to date (marked in blue). So, what does this tell us? In general terms, it appears volatility trends upwards ahead of Election Day before falling back thereafter. This year, however, the story is different: faced with the mother of all market dislocations thanks to Covid-19, volatility is already at historic highs. Where it heads next is anybody’s guess.
Chart two: What happens to the S&P 500?
How does the S&P 500 perform in the lead-up to election night? Here we considered elections dating back to 1992 and looked at the stock market response from three months before the result to one month before the result. Correlation isn’t causation but the data suggests a rising market might be associated with an incumbent win.
Chart three: How the US dollar performs
Using the same methodology and timeframes as above, we looked at how the greenback responds in an election year. Again, the data points to a tentative correlation: that an incumbent victory may be more likely when the dollar is weaker.
Chart four: Which combination of House/Senate/President is best for the stock market?
This data set goes all the way back to 19334 and considers the annual average performance of the S&P 500 under different permutations of partisan control. Here, history appears to underline the importance of checks and balances, with the most convincing stock market returns coming during a split Congress. Perhaps counterintuitively, a unified Congress appears to be correlated with weaker stock market performance.
Chart five: Who votes wins
The Pareto Principle,5 also known as the 80/20 rule, is based on real-life observations that there’s often a mismatch between inputs and outputs. In wealth distribution, for instance, the United Nations has highlighted how the richest 20% of the world's population generate 82.7% of the world's income.6 Looking back to the 2016 election result, we can see another example of the Pareto Principle in action – with neither Hilary Clinton nor Donald Trump garnering the votes of more than 20% of the US population as a whole.
Looking back to the 2016 election result, we can see another example of the Pareto Principle in action – with neither Hilary Clinton nor Donald Trump garnering the votes of more than 20% of the US population as a whole.
Chart six: Rising debt
Probably the starkest of our charts, this set of data highlights how US Federal debt has grown in recent decades. Between 1970 and 1990 total public debt barely grew. Fast forward to the aftermath of the global financial crisis and today’s post-pandemic pump-priming and the picture looks very different.
2 The Vix Index uses index options on the S&P 500 to gauge the market's broad expectations of volatility 30 days into the future.
3 NB: We excluded the 2008 election from the sample since it took place in the midst of the Global Financial Crisis and volatility was extremely elevated as a result.
4 Excluding 2001-2002 due to Sen Jeffords changing party mid-year 2001.
5 Named after economist Vilfredo Pareto.
6 United Nations Development Program: ‘1992 Human Development Report’, New York: Oxford University Press
Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.
Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY Mellon product.
BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
Views expressed are those of the manager stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.
Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Certain information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Securities Corporation is a subsidiary of BNY Mellon. 2020 BNY Mellon Securities Corporation, distributor, 240 Greenwich St, New York, NY 10286.