Monday, 28 October 2024 Reading time : 3 minutes

The countdown in the race for the White House is on: in a few days, on 5 November, Americans will decide who will succeed the Democratic incumbent Joe Biden. If the polls are to be believed, the race between the current Democratic vice-president, Kamala Harris, and the former Republican president, Donald Trump, will be extremely close. In the final stretch of the campaign, the two candidates are trying to win over undecided voters in hard-fought swing states. 

So far, financial markets have shown little reaction to the political events in the US. Although the US volatility index Vix is currently trading slightly higher than in the first half of the year, it remains below its long-term average of 20. The index measures the expected (implied) volatility of the S&P 500 over a 30-day period, based on option prices. The S&P 500 is now at a record high, although it has come under pressure in recent days. Market participants are now focusing on S&P 500 earnings, the majority of which have so far surprised on the upside, according to a mid-year review by data provider Factset. 

History also suggests that it pays for investors to make their investment decisions independently of political considerations. There are numerous data analyses trying to link the performance of the US stock market, usually measured by the S&P 500, to the ruling party in the White House. However, it is difficult to derive an investment recommendation from this¹. For example, looking at the period from 1926 to the present (before 1926, data on stock market performance is sparse), the data base consists of 24 elections – so the number of observations alone is quite limited. Moreover, many election years were marked by dramatic events that had an impact on market performance. These include the Great Depression (1932), World War II (1940, 1944), the bursting of the technology bubble (2000), the global financial crisis (2008) and the coronavirus crisis (2020). Excluding these effects, it is difficult to conclude that stock market performance depends on the party in power². If the individual election results are broken down even further – for example, by the party affiliation of the winner and by the balance of power in the Senate and Congress – the number of individual observations shrinks and the power of the analysis diminishes further.

Even in the short term, the effect of the election winner on stock markets appears to be negligible. An analysis of the average performance of the S&P 500³ shows that, thirty days after the election, the index posts gains that are similarly large when broken down by Democratic and Republican victories. However, the picture is different when the election is close or contested. The analysts have identified eight elections that they define as close, including the 2020 election (Joe Biden vs. Donald Trump) and the 2016 election (Donald Trump vs. Hillary Clinton). According to the analysis, the S&P 500 tends to fall in the run-up to a close election, before rising in the final week of the campaign and continuing to rise after Election Day, with volatility increasing during this period. So far, the Harris-Trump race also looks tight. However, there is no guarantee that the markets will follow the pattern of the past.

With the Capital Protection Note with Knock-out on the S&P 500, investors are protected against any market turbulence following the election, as the certificate offers 100% capital protection at maturity. Investors participate 100% in the upside of the underlying. If the knock-out of 120% is reached.

Termsheet: 134 141 568

Indicative terms

¹ How do U.S. elections affect stock market performance?, T. Rowe Price
^2,3 Elections and the Stock Market, Research Affiliates

 

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