This post may contain affiliate links. If you click and make a purchase then I may earn a commission at no extra cost to you. This post is about the current U.S. election and its relationship to the stock market.
Today is the big day - 11/3/20
As some of you may have noticed the stock market volatility, is due to the uncertainty of the U.S. elections. This is expected, and many have been preparing for this. However, this year is unique because there is the added volatility due to many other factors of this year. As we all have experienced, 2020 is a doozy.
A little contention never hurt anyone...before
However, another theme we are seeing in this election is something that has happened only 4 times before… a contested election. The day after an election the market generally settles, however, if it becomes contested then we may see a massive sell-off due to people wanting to mitigate their risk. Now, I will not delve too much into politics but it is apparent that this is a contentious election cycle, many of us outside the U.S. are watching with bated breath to see what happens next. We have seen an increase in polarization from both sides of the spectrum, and then many are caught in the middle of it.
The last contested election was in 2000 between George Bush and Al Gore. Now, we all know how that ended but the SPX had fallen 17.5% that year (from Sept 1 to one week after the Dec 12 Supreme Court decision).
This year, we are seeing the market becoming volatile a week before the election, but this year we did have a market drop where the VIX reached levels we had not seen since 2008, we recovered from that which demonstrated that many overestimated the impact of Covid-19 on the markets.
What about recent past?
Something to remember is that the stock market is not the economy. Something many people have learned this year. The stock market growth in comparison to the greater economy has some on edge.
Moving on, I do want you to remember the 2016 election, which is not considered a contested election but it was contentious leading up to the results. We did see articles that a Trump election would mean the start of another recession. Instead, we saw the market take into account this new information and recover, that election year the S&P 500 returns were 12.0%.
According to 2019 Dimensional Funds report, the market was positive 19 of the last 23 elections (1928-2016). I mentioned the 2000 election before but the S&P 500 returns that year were negative (-9.1%). I am drawing a parallel to the 2000 election because many things seem very similar, we had Y2K and then a contested election. Could 2020 be similar? We will not know for sure until we see the results.
Overall, I want you to remember that we should not be looking at a small picture of how an event affects the market, but the overall picture. The stock market has grown over time and the best thing to do is to stay long and keep doing what you have been doing. It is hard to see the market drop along with the value of your accounts. The best way to election-proof your portfolio is to leave it alone.