Do Elections Cause Market Volatility? What You Need to Know as November 2020 Gets Closer

Even those who don’t follow politics closely know that there’s a consequential election coming near the end of 2020. With only a few weeks left to go before the nation casts a vote on who will lead the country for the next four years, now is a good time to look at how elections affect markets in general, and some specifics to understand about what is unique about this year.

do markets impact elections

Historical Effects of Presidential Elections on the Markets

If you look at the last 60 years of data related to presidential elections and stock market activity, most of the volatility occurs before the election takes place. September tends to be the worst month for market volatility, with stocks losing an average of 0.51% historically (although that trend has reversed somewhat in the last 25 years). In fact, most election years have less volatility in the markets leading up to an election than non-election years.

On the whole, market trends are positive for election years. In 19 of 23 presidential election years (going back to 1928), only four years have negative returns. But the election itself is not the only factor that can influence market performance. In 2008, a recession dramatically changed the “normal” cycles of the market. In 2020, a combination of many factors brought on by the global pandemic are once again influencing the markets far more than the presidential election.

What Experts Predict for 2020 and the Markets

This year’s election is likely to be consequential for many reasons.

From a tax perspective, the policies of the two nominees are very different. In the 2016 election between Donald Trump and Hillary Clinton, the markets focused heavily on tax policies, primarily because that is one of the most direct ways lawmakers can impact corporations and individuals.

The same is true in 2020, with investors expecting that a Trump second term would continue a similar tax-cutting trend, while a Biden victory would potentially lead to an increase in taxes for high-income earners and a full or partial reversal of the corporate tax reduction from the Tax Cuts and Jobs Act.

COVID-19 has also dramatically altered the market landscape for 2020. After hitting a record high of 29,551.42 on Feb. 12, the Dow Jones Industrial Average was down 35% just a few weeks later on March 20. Two of the top five largest single-day drops in history occurred on March 16 and March 12 when the Dow lost 12.93% and 9.99%, respectively.

Since that time, it has regained most of the losses, but remains volatile as the election approaches. Recent events such as the death of Supreme Court Justice Ruth Bader Ginsberg have further amplified Wall Street’s worries ahead of what was already promising to be a volatile election season.

What Does This Mean for Investors?

If you are worried about your own portfolio or what potential election results could mean for your company and personal financial situation, now is the time to talk to an experienced tax advisor. Cantley Dietrich can help you identify personal estate and planning opportunities, even during a pandemic and presidential election.