Biden Out
Takeaways
Increased Market Volatility During Election Years: Historically, equity market volatility, as measured by the VIX, tends to increase during presidential election years. The recent climb in the VIX suggests the likelihood of additional volatility leading up to November.
Positive Economic Backdrop: Despite the political uncertainty, the economic environment remains positive. Growth is stronger than expected, inflation is easing, and the labor market is loosening. Corporate earnings are also strong, with the S&P 500 expected to see double-digit growth by the fourth quarter.
Importance of Diversified Portfolios: Investors should focus on maintaining well-diversified portfolios that include a mix of large and small companies, stocks and bonds, and US and non-US holdings. This diversification can help manage potential volatility and provide opportunities for appreciation over time.
If any of you have tuned into my recent presentations, webinars or podcast appearances, you would have heard me talk about investing in an election year. I’ve argued that, in some ways, this cycle represented a lower-than-average political risk given that both have already held the job. Whatever you thought about the candidates’ policies, we had seen both men in action and knew what to expect from their policies and the people they surrounded themselves with.
As you can imagine, I just threw that presentation right out the window with Biden stepping down and handing the mantle to Kamala Harris. As uncertainty rises, the financial markets can act like a cat in a rocking chair factory … and no one wants to hear a screeching cat. Over the next few months, the political process will unfold as the laws dictate but here are a few things I’ll be keeping my eye on.
Normally in the summer and early fall we see volatility increase driven by seasonal factors and the upcoming election. Even before Biden stepped down from his re-election bid, the VIX, a measure of equity market volatility, began to climb. From a recent low of 12 in early July, the VIX rose to 16 this past weekend. On average, in all presidential election years since 1990, the VIX has hit 26 before the election suggesting the likelihood of additional bumps along the road to November.
Average Volatility – Election vs Non-Election Years
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index.
Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. Source: Kestra Investment Management with data from FactSet. Index proxies: Bloomberg U.S. AGG Bond Index, ICE BofA U.S. Corporate, ICE BofA U.S. High Yield, S&P 500, MSCI EM, MSCI World ex US Index, Dow Jones U.S. Select REIT, and Bloomberg Commodity Index. Data as of March 28, 2024.
Despite heightened political uncertainty, the economic backdrop remains positive. Growth continues to remain stronger than expected, inflation is easing, and the labor market is loosening. The Federal Reserve looks likely to being cutting interest rates this fall, which could be a boon to stocks. Corporate earnings are positive. In the second quarter, S&P 500 earnings likely grew close to 10%, the highest growth rate since late 2021. While a large portion of that growth has come from just four names – Nvidia, Amazon, Meta and Alphabet – the remaining companies in the S&P 500 are expected to enjoy double digit earnings growth by the fourth quarter.
So, what’s an investor to do? Even though volatility typically increases during an election, market returns are on average the same in election and non-election years. Meaning that once the political uncertainty is out of the way, markets tend to return to focusing on the fundamentals and right now, the fundamentals look pretty good. Being mindful of recent trends (like smaller capitalization stocks outpacing larger stocks), the best preparation for any volatility is a well-diversified portfolio that carries the right level of risk for your goals. Make sure you have representation from large and small companies, stocks and bonds, US and non-US holdings. That variety of asset classes and exposures can help weather any potential storm, while still providing opportunities to appreciate over time.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, and Bluespring Wealth Partners, LLC. Does not offer tax or legal advice.
