2016 Elections – U.S. Elections Intensify Market Volatility
Market volatility typically increases during U.S. election years. The volatility so far this year is greater than what we typically have seen in an election year.
Tracie McMillion, CFA®, Head of Global Asset Allocation Strategy
- Market volatility typically increases during U.S. election years.
- When we divide election years into “open” election years and “reelection” years, we see a marked difference in average returns.
What it may mean for investors
- Investors should hold a diversified portfolio that includes bonds which can help stabilize portfolios and equities to help provide growth potential over the full economic cycle.
How are U.S. elections related to financial-market performance and could they be contributing to the recent market weakness? This year’s U.S. election is shaping up to be like none other in our recent history. Currently there are 11 candidates running for office of the U.S. presidency. While there are familiar names vying for the oval office like Clinton and Bush, there are also names like Trump and Fiorina that are more familiar in corporate board rooms than inside the Beltway. The variation of views among the candidates within both political parties is one of several factors that are injecting uncertainty into the financial markets. How will this year’s election influence the markets compared to past election years?
The volatility so far this year is greater than what we typically have seen in an election year. The average total return (including dividends) for the S&P 500 Index during the fourth year of a presidential term has been 11.3 percent going back to 1928. That’s higher than each of the first two years, but lower than the third year.
When we split election years into “open” election years and “reelection” years, we see a marked difference in average returns. Since 1933, the average price return (not including dividends) in an election year has been 6.5 percent. The average price return during open election years has been 1.2 percent and the average price return during reelection years has been 9.7 percent. The uncertainty that comes from an open presidential race appears to impact domestic market returns. When we add the wide variation in platforms and ideas that this election season is spawning, volatility is an expected outcome.
A variety of factors are fueling uncertainty in today’s financial markets, including weakness in the oil markets, slowing global growth and monetary policy. In addition, the primary election contests ahead of each Party’s National Convention that will convene later this summer coupled with potential changes to fiscal policies following November’s outcome are also likely contributing to some of the market volatility we are seeing in the domestic financial markets. It is important for investors to bear in mind that resolution to some of this election uncertainty will be forthcoming as the year progresses. With more certainty, markets can respond by reassessing growth expectations in light of likely fiscal policy changes.
In the interim, we believe that investors should hold a diversified portfolio that includes bonds, which can help to stabilize portfolio values in times of distress, and equities that are expected to provide growth potential to the portfolio over the full economic cycle, despite the volatility that this asset group can often exhibit.
Stocks are subject to market risk which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.
Investments in fixed-income securities are subject to interest rate and credit risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Diversification does not guarantee a profit or protect against loss.
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Wells Fargo Investment Institute, Inc. (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors, and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
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