The first half of 2020 felt particularly unstable and unpredictable with the pandemic, protests, hurricanes and wildfires. As we move further into the fall, the fact that 2020 is also an election year may give rise to a new set of concerns. During the coming weeks, the presidential campaigns will only increase in momentum as they prepare for November and investors might be wondering how to prepare as well.
The months surrounding major elections are typically thought to be times of heightened market volatility. This is understandable as the news and social media outlets tend to highlight the differences in each candidate’s vision for the future of the economy, therefore it would seem that the uncertainty and potential for change in policies would result in major fluctuations in the market.
However, a new report from Vanguard reveals that there is no major increase in market instability during election years compared to non-election years. The study shows that although elections are major events for the country, “their impact on market returns has historically proven to be negligible, as shown in the chart below.”
Vanguard’s report then focuses specifically on the time period immediately surrounding presidential elections. The data reveals that although investors may expect market instability, in actuality, the opposite has been true. "From January 1, 1964, to December 31, 2019, the Standard & Poor’s 500 Index’s annualized volatility was 13.8% in the 100 days both before and after a presidential election, which was lower than the 15.7% annualized volatility for the full time period.” In other words, markets tend to ignore elections.
The thought of going through an election during an already tempestuous year may raise some concerns, however, the report out of Vanguard is clear that, “Elections are another one of those events that generate lots of headlines but that should not sway you from following the financial plan [you and your advisor] created. It’s understandable to have concerns about the election. But as far as your portfolio and the markets are concerned, history suggests it will be a nonissue.”
This does not mean that the markets won’t be volatile, it just means you have to stay focused on the months ahead, and not make irrational decisions in an irrational market.