Advisers with clients nervous about the impact of the US election might find it worthwhile to share historical data which shows any volatility caused by presidential polls is generally short-lived.

Some market analysts believe there is scope for near-term market volatility post the election but many suggest that adjusting portfolios in anticipation of the outcome may lead to sub-optimal returns over time.

“No matter the outcome, the US general election will likely fuel volatility,” says Saira Malik, Head of Nuveen Equities and Fixed Income.

“Since 1992, each November election and its immediate aftermath has been marked by spikes in equity market volatility, as measured by the Cboe Volatility Index (VIX) – and this year should be no different,” Malik says. 

She acknowledges that other events have created far greater spikes in the VIX but argues the index is above its long-term average (at 21 October 2024) and in line with the average of the past eight election cycles. 

“We think increased US equity market volatility should help make non-US stocks, which already offer some relative advantages, look even more attractive,” she argues.

Democrats vs Republicans

AMP Investments’ Head of Investment Strategy, Shane Oliver, points in a recent article on 9 October 2024 to a number of potential impacts on markets as a consequence of the election – some of which are general and others dependent on the ultimate winner.

“Firstly, despite the heightened policy uncertainty the election year is normally okay for US shares. Since 1927, the election year, or year four in the presidential cycle, has had an average return of 12%, which is also the average across all years. So far, they have returned 22%. It’s usually years one and two which are below average,” Oliver says.

“Second, the next few weeks could see increased volatility if investors start to focus on the risks of a new trade war, a hit to the US labour force and increased uncertainty under Trump,” he wrote on October 9.

He further notes that US shares have done best under Democrat presidents with an average return of 14.4% per annum since 1927 compared to an average return under Republican presidents of 10% per annum.

There are some caveats to this – the best average result has actually occurred when there has been a Democrat president and Republican control of the House, the Senate or both and the worst average return has been when there’s been a clean Republican sweep, according to Oliver.

His final observation is that a Trump presidency would likely mean higher bond yields and a higher $US. A narrow Trump loss could also encourage him to challenge the result, with consequent political uncertainty adding to market volatility (though Oliver says US democratic institutions should hold as they did in 2020).

Politics vs Economics

History suggests, though, that any initial volatility may wane over time. Several analyses show that political parties ultimately have a more limited impact on markets than the economic cycle.

A JP Morgan analysis has found that “average annual returns on the S&P 500 during the Obama administration of 16.3% and during the Trump administration of 16% were almost identical and higher than the average return over the last 30 years of 10.4%. 

“It is likely the macro conditions, like ultra-low interest rates enjoyed during both Obama and Trump administrations, were a more influential driver of above-average returns during those periods, rather than the policy prescriptions each president espoused,” its team says.

JP Morgan’s analysis found markets tend to be more volatile in the lead-up to the election, but after election day, that source of uncertainty is cleared, and, regardless of the result, markets move on and refocus on the fundamentals. 

“In fact, median returns in the first three quarters of an election year were 1.9% compared to 3.1% in the fourth quarter going back to 1936,” its team says.

Russell Investments’ latest Global Market Outlook reiterates similar principles by arguing the democratic system of US government features checks and balances that make it hard for individuals and parties to enact sweeping change. 

“As a result, and over many decades, the impact of politics on US markets has been limited. US stocks, for example, have trended higher no matter which political party held office. And diversified, 60/40 portfolios have delivered positive returns in most presidential-election years – something we expect is on track again in 2024,” it says.

Likewise, Vanguard research dating back to 1860 has also found no statistical relationship between the performance of a 60% equity/40% bond portfolio in US presidential election and non-election years.

“Markets efficiently ‘price in’ current events. It’s difficult to predict volatility or blame it on one specific cause, because there are dozens of potential factors. Market reactions reflect changes in economic expectations and efficiently price in current events, including elections,” Vanguard says.

According to its research, “for US presidential elections from 1984 to 2020, the Standard & Poor's 500 Index's annualised volatility was 16.5% in the 100 days before a presidential election and 15.9% for the 100 days after an election, both of which were lower than the 17.9% annualized volatility for the full time period.”

Just about every fund manager and analyst has crunched the numbers about how the US election may impact markets. Each has produced somewhat different results – but the overarching conclusion is that investors may be best placed to ignore the election noise and remain true to long-term asset allocations.

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