Stock Market and Elections

Update for 2020

Okay so somebody asked me to update this post to include this year’s stock market behavior given that this has been such a crazy year (weirdly enough my original post was almost exactly 4 years ago to the day).

After the last debate tonight, I decide to take a look at the VIX (the index that measure stock market volatility, also known as the FEAR index) for this year to see if there’s any significant deviations from other election years. Here’s the VIX:

The VIX hit a high of 82.69 back in March during the prime of COVID-19. However, since then, the VIX has gradually subsided and has range-bound between 20 and 30. Compared to the other election years, it appears this year’s VIX is higher than most other election years.

In my original post below, except for the recession, VIX during election years usually ranged from low 20s to high 10s.

Original post (originally published October 23, 2016):

What happens when you combine the stock market and elections? Election years tend to shake up the market because of the contrasting business policies from each side. This year we had a Trump vs Hilary show down. Trump has been known to be very pro-business. A pro-business agenda may benefit the stock market and elections a lot. The benefits that big businesses will reap with the election of Trump. On the other hand, Hilary is for the people. Her policies will probably benefit people more than benefit businesses. Is this good for bad for the stock market and elections? All we can do is speculate. Some are even saying that if Trump wins, the market will crash. From these comments I began wondering what happened in the previous election years. The real question is: Is there even a relationship between the stock market and elections?

What Happens with Stock Market and Elections?

To determine if there was any relationship between the stock market and elections, I took the historical graph of the VIX from 1990 on to analyze. Think of the VIX as a tracker. It tracks how much fear is in the stock market.

When there’s blood in the streets, the VIX jumps up. If the stock market is growing steadily and peacefully, the VIX is low.

The parts in orange are election years.

 

VIX during election years
The VIX Index During Election Years

From the chart, it doesn’t seem like there’s much of a relationship between the stock market and elections. However, the Financial Crisis in 2008 was an exception. The fact that it happened to be an election year may have been completely coincidental. In fact, that year the entire financial system almost went down. I believe this could have happened in any year, not just an election year. And I also don’t think the election had much to do with the crash of the housing sector.

Next, I decided to dive a little deeper into each election year to see if there were any patterns between the VIX and S&P 500 in those years:

 

S&P 500 VIX and Elections

Aside from the 2008 outlier, it seems that there is no significant explanation between the stock market and elections. It also seems this year, the VIX appears to be moving downward, reaching lower levels than any other year.

It’s somewhat safe to say that election years do not have any major impacts on the Markets. Though, our sample size is still small with the VIX being relatively young compared to the overall age of the market.

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