The financial markets may be signaling calm after the recent recession scare, with encouraging economic data hinting at possible rate cuts by the Federal Reserve. However, traders and investors shouldn’t get too comfortable just yet. As the U.S. presidential election season heats up, market analysts warn that volatility could increase between now and November 5, creating potential pitfalls for stocks, particularly within the S&P 500 (SPX).
Historically, the stock market does not perform well during election years, and 2024 could be no exception. The S&P 500’s historical patterns indicate a period of heightened volatility and underperformance in the months leading up to Election Day. According to CFRA Research, September has typically been the worst month during election years, with an average decline of 0.8%. In fact, September has shown negative returns more frequently than any other month in election cycles since 1944.
“August and September are two of the three worst months of the year during election cycles, with September being the weakest by far,” said Sam Stovall, chief investment strategist at CFRA Research. “This is true not only in terms of average decline but also in the frequency of downturns.”
Although October has historically brought an average gain of over 1% during election years, it remains the most volatile month, with a 35% higher standard deviation than the other months of the year. October’s volatility makes it a critical period for traders, where swift market swings could open up both risks and opportunities.
Election Uncertainty and Market Reactions
One of the critical factors contributing to this heightened volatility is the uncertainty surrounding the election outcome and its potential implications for fiscal and regulatory policies. Historically, when the incumbent party fails to retain the presidency, the stock market tends to experience higher volatility before and after the election. This uncertainty stems from the likelihood of policy changes under a new administration, which can significantly impact sectors reliant on government regulation, such as healthcare and energy.
On the flip side, when the incumbent party retains the presidency, market volatility tends to decrease in the run-up to the election but can tick up slightly afterward. With this year’s race between Kamala Harris and Donald Trump shaping up to be tightly contested, investors are finding themselves in a precarious position, trying to weigh the potential market implications depending on who emerges victorious in November.
“Given the recent shift in Democratic leadership from President Joe Biden to Vice President Kamala Harris, there is a new layer of uncertainty in play,” said Arnim Holzer, global macroeconomic strategist at Easterly EAB Risk Solutions. “This has contributed to the fluctuations we’re seeing in the market.”
Healthcare Sector Gains but Risks Loom
One of the sectors most exposed to election-related risks is healthcare. The S&P 500 healthcare sector (SP500.35) has outperformed the broader market over the past month, advancing 4.6% compared to the S&P 500’s 1.8% gain. Stocks in this sector have benefited from strong earnings growth driven by popular weight-loss drugs like Ozempic and Zepbound, which have given a substantial boost to pharmaceutical companies.
However, investors should approach these gains with caution. If Harris continues to gain momentum in the polls, there is the potential for policy changes that could impact drug pricing and managed care under a Democratic administration. “Healthcare stocks have shown little concern so far, but the threat of policy changes to drug pricing under a Harris administration could weigh on returns if she wins the presidency,” Holzer added.
Meanwhile, traders are also closely watching Trump’s polling trends. Some in the healthcare sector are banking on Trump’s potential return to the White House, hoping his administration would introduce regulatory reforms that could boost profitability for health insurers and pharmaceutical companies. The sector rotation associated with a possible Trump victory could increase volatility as traders reposition portfolios to reflect the potential policy shifts.
Elevated Volatility on the Horizon
The political landscape has always been a major influence on market behavior, and this year is no different. With Harris leading in most national polls, but the race remaining close, analysts anticipate continued market turbulence through the election cycle. “Investors should be prepared for significant volatility between now and Election Day,” Holzer said. The Cboe Volatility Index (VIX), commonly known as Wall Street’s fear gauge, has already ticked higher in recent days, reflecting this heightened uncertainty.
In the broader markets, U.S. stocks were mixed on Tuesday morning ahead of a critical speech from Federal Reserve Chair Jerome Powell at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. Powell’s remarks could set the tone for future interest rate cuts, adding another layer of complexity to the market’s election-driven swings.
As of Tuesday morning, the S&P 500 was down 0.2%, the Nasdaq Composite (COMP) lost 0.4%, and the Dow Jones Industrial Average (DJIA) edged lower by 0.1%. Traders are watching Powell’s speech closely, as his commentary on monetary policy could either amplify or mitigate the market volatility that’s already expected from the election season.
Key Takeaways for Traders and Investors:
- Volatility on the Rise: Traders should expect increased volatility in the coming months, particularly as the election date draws near. The S&P 500 has historically underperformed during election years, with September and October being particularly turbulent.
- Sector Exposure: The healthcare sector is a key area to watch, with the election outcome having the potential to significantly impact drug pricing and regulatory policies. A Trump victory could boost this sector, while a Harris win could introduce new risks.
- Macro Uncertainty: Beyond the election, macroeconomic factors such as the Federal Reserve’s interest rate policies will continue to influence market sentiment. Powell’s upcoming speech may provide further clues about the trajectory of rates and market liquidity.
- Prepare for Market Swings: As the election nears, traders may see sharp market swings based on polling updates, debate performances, and policy announcements. Strategies like hedging against volatility with instruments like the VIX could be worth exploring.
Conclusion:
For traders, the next few months will be a period of heightened risk, but also of significant opportunity. Election-driven volatility, paired with potential shifts in monetary policy, will require investors to stay nimble. By keeping an eye on both the political landscape and the Federal Reserve’s moves, traders can better position themselves to navigate the uncertain market environment leading up to November.
