Volatility is an unavoidable byproduct of investing in equities, but the sources of market volatility are varied and many. Geopolitical risks, macroeconomic developments, the ebb and flow of the corporate earnings cycle, and changes in monetary or fiscal policy are just some of the potential catalysts that can swing to the benefit or detriment of equity investors. At any given time, multiple sources of risk can coalesce, leading to a potentially more pronounced or prolonged bout of volatility.
The chart above illustrates the average historical path of stock market volatility during presidential election years since 1992 using the CBOE Volatility Index (VIX). The VIX tends to remain in a lower volatility range (below 20) through much of the year, with a more pronounced ramp-up in volatility in the months leading up to Election Day, before subsiding thereafter. This is largely attributable to investor uncertainty related to the election outcome and the resulting direction of various policies that could result. The VIX has peaked around 27, on average, in the past eight election years, typically occurring over a handful of days prior to the election. That level pales in comparison to the type of market volatility that accompanies recessions and bear markets but can create a bumpier ride for investors during the period leading up to Election Day.
What’s the bottom line? An uptick in volatility leading up to the election would come as no surprise given the experience in recent decades. The post-election story has generally been notably different, as volatility has generally receded as the market shakes off election-related jitters.
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