Election Cycles and Market Volatility
Elections inject policy uncertainty into markets. The outcome determines tax rates, regulatory regimes, trade policy, and government spending priorities. Markets respond not to which party wins, but to the range of possible policy outcomes and how quickly that range narrows.
Why Elections Move Markets
Markets price expected future cash flows. Elections change corporate tax rates, regulatory costs, trade policy, and government spending.
Key insight: Volatility often peaks before elections (maximum uncertainty) and declines after (outcome known, even if unfavorable).
Historical Volatility Patterns
VIX behavior around US presidential elections (1990-2024):
| Period | Average VIX | Change vs. Non-Election Years |
|---|---|---|
| 6 months before | 19.2 | +15% |
| 1 month before | 21.4 | +28% |
| Election week | 23.1 | +38% |
| 1 month after | 17.8 | +6% |
| 6 months after | 16.3 | -3% |
Contested Elections Amplify Volatility
2000 Election: VIX spiked to 31 during recount; S&P 500 fell 8% between election and Supreme Court decision.
2020 Election: Pre-election VIX at 38 (COVID elevated); normalized to 20-22 post-inauguration.
Sector Sensitivity
Healthcare
- Drug pricing, ACA changes, Medicare/Medicaid policy
- Underperforms before elections with major healthcare stakes
Energy
- Permitting, renewable subsidies, carbon regulation
- Traditional vs. clean energy differentiation can exceed 20%
Financials
- Regulatory stringency, tax policy, antitrust enforcement
Technology
- Antitrust, Section 230, AI regulation, China trade policy
Policy Uncertainty Indicators
Economic Policy Uncertainty Index
The Baker-Bloom-Davis EPU Index measures policy uncertainty using newspaper coverage, tax code expirations, and forecaster disagreement.
- Rises 20-40% in election years
- Peak in October-November
- Decline within 1-2 months of resolution
Options Market Signals
Options expiring after election day price 2-4 VIX points higher implied volatility. Premium collapses after outcome known.
Historical Election Year Returns
S&P 500 average by year in cycle (1932-2024):
| Year in Cycle | Average Return | Positive Years |
|---|---|---|
| Year 1 (post-election) | +6.2% | 58% |
| Year 2 (midterm) | +4.8% | 62% |
| Year 3 (pre-election) | +16.4% | 88% |
| Year 4 (election) | +7.3% | 73% |
Post-midterm returns: 6 months following midterms average +15% (1942-2022). Gridlock reduces policy risk.
Positioning Strategies
Pre-Election (3-6 Months Before)
- Reduce position sizes if volatility elevated
- Avoid large sector bets dependent on outcome
- Increase cash buffer if rebalancing planned near election
Election Week
- Avoid major portfolio changes
- Set limit orders rather than market orders
- Expect gap opens and intraday volatility
Post-Election (1-3 Months After)
- Volatility premium collapse creates opportunity
- Sector rotation toward election winners
- Policy clarity enables fundamental positioning
Common Pitfalls
Pitfall 1: Making portfolio bets on election predictions Pitfall 2: Overreacting to rhetoric (campaign promises differ from enacted policy) Pitfall 3: Ignoring state/local elections affecting specific sectors Pitfall 4: Trading immediately on results (initial reactions often reverse) Pitfall 5: Assuming divided government is always positive
Summary
Elections create measurable volatility patterns driven by policy uncertainty rather than partisan outcomes. VIX elevates 15-40% approaching elections and normalizes within months afterward. Sectors with high policy sensitivity show the largest election-related moves. Practical positioning involves reducing policy-sensitive exposure pre-election, avoiding trades during election week, and reassessing once outcomes clarify.
Related Articles
- Mapping Geopolitical Risk to Asset Classes
- Scenario Planning Workshops for Investors
- Building a Risk Event Dashboard
References
Baker, S., Bloom, N., and Davis, S. (2016). Measuring Economic Policy Uncertainty. Quarterly Journal of Economics.
CBOE (2024). VIX Index Historical Data.
Bialkowski, J., Gottschalk, K., and Wisniewski, T. (2008). Stock Market Volatility around National Elections. Journal of Banking and Finance.