Calm Before the Election Storm?

Marc Zabicki:

As the U.S. election season starts to ramp up in earnest, the proceedings are going largely as we expected. We had thought this election season was going to be very different and that investors would need to remain on their toes. That is very much the case. In this latest edition of LPL Street View, we will set aside the politics of the day, at least for the moment, we will be providing more on our election expectations in the weeks ahead. Instead, we will look at a simple data series that tells us, despite all the news to date, this may indeed be the calm before the election storm.

Marc Zabicki:

While the U.S. election news in recent weeks has indeed been historic, given the attempted assassination of former President Trump and with current president Biden suspending his reelection campaign, we may only just be getting started. Why is that? Well, by the looks of the equity market so far, investors seem to be taking the tumult right in stride. Equity indices remain near all-time highs and volatility indicators are near multi-decade lows. History tells us, however, that this may all be ready to change. Indeed, election seasons in years past have often been proceeded by relative calm in the summer, months before the storm of volatility begins to rise as we approach election day. The orange line in this chart represents the average volatility readings in election years dating back until 1992. Market volatility troughed at about two-thirds of the way through the year before ramping up dramatically as voters were getting ready to go to the polls.

Marc Zabicki:

The light-blue line follows the volatility progression we have seen so far this year. Indeed, volatility has been lower than normal relative to history, and it has so far remained near the lows for the year. Low volatility is generally good for stocks while high volatility causes a bit more distress for markets. Is volatility getting ready to ramp up as this very different election season get started? We think so. What's the message here? Well, while history shows that it has not proven to be a good idea to base investment decisions off of election outcomes, the pattern of higher volatility as we approach the election does indicate investors should ensure their portfolio can withstand a bumpier ride. The relatively smooth ride we have witnessed so far in 2024 can lull you to sleep. Don't let it. This will be a different election season. We have already seen that. Don't get too far over your skis. Thanks for listening, and as always, allocate wisely.