Key Points:
- Election headlines are everywhere.
- Historically, volatility does not increase pre-election.
- Stay focused on long term goals and plan.
There is no shortage of headlines this election season that may cause investors to question their risk appetite. Each election raises questions about future policy changes that could impact a wide range of items such as taxes, regulations, or social programs. Many pundits have commented that these questions could push volatility higher as we get closer to the election. We thought it would be a useful exercise to analyze volatility in periods leading up to election day to see if there is data to support this possibility.
We examined the 3-month rolling standard deviation of the S&P 500 Index from January 1990 through August 2020. We compared the entire dataset against the three months (August, September & October) leading up to November in election years. We found no measurable difference in those periods, the average and median are statistically equal. We also analyzed various other measures, such as range, skewness, and kurtosis. These showed slightly less variability in the pre-election periods.
Our behavioral biases cause us to put a greater emphasis on what has happened most recently. It is important to step back and focus on longer-term history. Over the last 30 years, we have seen periods where one political party control Congress and the White House and periods where control is split. We have also seen many changes to public policy. Over that time the S&P 500 has averaged an annual return of just over 10%.
History indicates that volatility has remained within its normal range in the months leading up to an election. We encourage investors to keep that in mind and remain focused on their long-term goals and financial plan.
Sources: Morningstar.
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Disclosure: The information provided herein is the opinion of The Pacific Financial Group (“TPFG”), a registered investment adviser, and may change without notice at the discretion of TPFG. Market Data is as of the time period noted and TPFG makes no warranties as to the accuracy of the information or any representations made or implied at any time given. The information should not be construed or interpreted as an offer or solicitation to purchase or sell a financial instrument or service. The information is for informational purposes only and should not be relied on or deemed the provision of tax, legal, accounting or investment advice. Past performance is not a guarantee future results. All investments contain risks to include the total loss of invested principal. Diversification does not protect against the risk of loss. The S&P 500 index represents the broader market, is unmanaged and cannot be invested in directly. Indices do not consider the costs, fees, trading, dividends or performance that an investor would otherwise experience when investing.