Do Stock and Bond Markets Become More Volatile Around US Presidential Elections?

In the year of a US presidential election, questions about implications for financial markets come to the fore among investors. Specifically, what are the volatility trends of stocks and bonds before, during, and after elections? The purpose of this article is to answer that question on a historical basis. We’ve analyzed the last 20 years of market trends across five presidential elections. Let’s take a look at the findings.

Equity and Bond Market Volatility Focus

First, we focus on the period of a week or two before and after election day. We take a closer look into equity and bond market volatility by examining the values of a US equity market volatility index as well as the daily returns of a US high yield corporate bond index. For both, we focus on the last five elections:

• November 3, 2020

• November 8, 2016

• November 6, 2012

• November 4, 2008

• November 2, 2004

Our research revealed there is a local spike in volatility on both equity and bond markets before and close to election days. This is depicted by the dots in the first chart below for the equity volatility index and the orange ovals in the second chart for the bond index daily return dynamics.

The impact on volatility in 2008 is widely attributed to the financial crisis at the time, and in that context the election date volatility appears less pronounced. That said, we observed increases in volatility very close to election dates over the last 20 years, none of which were related to volatility clustering or followed by longer periods of market turbulence.

The increase in volatility leading up to election dates is also very similar to other local volatility spikes, depicted in yellow circles below as a few examples. This indicates the impact from elections on market dynamics is not in any way exceptional. The dynamics and direction of the markets seem to be influenced more by macroeconomic factors such as inflation, interest rates, foreign exchange rates, or economic growth.

Market Index Value and Trend Focus

As a next step, we observe the US equity index value and the US high yield corporate bond index value in the context of US election days—however we also zoom out of the close-to-election dates to examine the direction of the market.

Looking at the charts below for the last 20 years of market responses before/after elections, the market continued to follow the trend, which is displayed before election days. Equity and high yield bond markets trended upward in 2004, 2012, 2016, and 2020 and trended downward in 2008. US presidential election outcomes did not revert this longer-term trend in the market.

The circular pop-outs for each of the election days, depicted by the blue dots, provide a zoomed-in view of approximately one month before and one month after each election. We notice signs of short-term volatility observed in the dates around each election. However, beginning a few days or weeks after the impact is no longer observed, the longer-term trend resumes.

Stress Test Replication

Using the FactSet stress testing module, we replicated historical periods for each of the past three elections (2020, 2016, 2012) on today’s broad market indices. We analyzed markets across two time spans for each election: one week pre/post and one month pre/post. This helps us determine the implications for market returns.

We analyzed a US large and small cap equity index, US treasury index, US investment grade bonds index, and a US high yield corporate bond index.

• The one-week pre/post results show a change in direction of returns, indicating there is short-term volatility around the election date

• The one-month pre/post results show a consistent market direction, indicating the trend for each market is not changed due to presidential elections

Conclusion

Despite some short-term volatility around election days, historically US presidential elections have not had a large impact on the existing market trends. Both equity and bond markets are impacted by macroeconomic and financial drivers more than the political outcome from US presidential elections.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.