Close Elections Bring Volatile Markets

Michael Normyle – Nasdaq’s US Economist joins IBKR’s Jeff Praissman to discuss the effects of elections on the stock market and how the landscape has changed since they discussed in Episode 140, “Volatility is Winning the Election Year”

Summary – IBKR Podcasts Ep. 201

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman 

Hi everyone. My name is Jeff Praissman with the Interactive Brokers Podcast. It’s my pleasure to welcome back to the program, for our monthly podcast, Michael Normyle from Nasdaq. Hey Michael, how are you? 

Michael Normyle 

Doing well. Thanks. How are you? 

Jeff Praissman 

I’m doing great. And it’s great to have you back in the studio as we do our monthly podcast on the economy. Michael’s kind enough to join us from Nasdaq each month to cover different issues.  

Michael, back in February, we discussed the upcoming election in our podcast, “Volatility is Winning the Election Year”. A lot’s changed. At that time, we had three candidates that were running. Now we’re down to two, and with actually a change in the Democratic Party from Biden to Harris, leading up to what looks like a very close election. 

During a close election, how does volatility react?  

Michael Normyle 

Historically, the trouble with close elections is that it leads to increased uncertainty and markets don’t like uncertainty. So you tend to see more volatility. So going back to 1990, and this is the whole history that we have for the VIX volatility gauge. Close election years see volatility increase about 45% between August and October on average. 

And then volatility actually falls a little in November, but that’s because election day tends to be early in the month. So once the election is over, volatility tends to subside as that uncertainty is resolved and then eases even more in December. 

Jeff Praissman 

Now, this election. Looks to be almost 50-50, very close. Is it the same pattern for election years when, say, one candidate is far ahead in the polls? And, how do both of those scenarios compare to non-election years leading up to this time of the year? 

Michael Normyle 

Yeah, so those types of landslide years, which I define in my research as years where the winner got at least 370 electoral college votes. So 100 more than the 270 required to win. There’s really no discernible increase in volatility over the back half of the year. And again, that’s really a result of the level of uncertainty or really lack thereof in the case of elections where the results are pretty solidly priced in advance. 

But that’s actually less volatility than is typical. There tends to be a bit of a seasonality element to volatility. So if you look at nonelection years, volatility rises about 15% from August to October. So 1/3 as much as the increase we see in close election years, but more than the pretty stable VIX levels that we see in those landslide years. 

Jeff Praissman 

And, historically, is trading more active pre or post the election results? 

Michael Normyle 

It might surprise people to learn, but trading actually tends to be higher after the election. So you might think that there’d be trading ahead of the election to position for it. But what we actually see are volumes increasing after the election. That’s really probably people rebalancing their portfolios to account for the expected sector and stock beneficiaries from the now more certain policy changes ahead. 

Still, the impact on volumes does change from election to election, so if we look at 2012, volumes peaked about 30% higher than on election day, and that was a few days later. But for the last two elections, volumes peaked about 75 to 90% higher than on their election days.  

So once again, this really gets back to that uncertainty element. 

The 2012 election, when President Obama won his second term, that was less of a surprise than President Trump’s win in 2016, which defied a lot of the polls that people saw leading into that. And even President Biden’s win in 2020. 

Jeff Praissman 

And, obviously, presidential elections are a huge event for the U.S., and I would make an argument for the markets around the world as well, just because of the influence the U.S. has over the world markets.  

You hear a lot in financial news about different trading spikes, and my question is, how do trading spikes compare based on electoral events versus other major events, like there’s so many major events we’ve had, such as like the 2010 flash crash or say the 2023 regional bank crisis. Like how does election trading spike compared to any other news events? 

Michael Normyle 

Yeah, so in reality, the increase in trading activity around elections is relatively small compared to those other events that you mentioned. So for example, in the last couple of presidential elections, at their peak, activity increased about 60 to 75% relative to the previous six months. So taking a pretty big sample period there. But other surprise events, they saw much bigger impacts. 

So like you mentioned, the 2010 flash crash, for example, that saw about 100, 125% increase. And then something like COVID was a lot bigger seeing 190% increase, but even something like a generic sell off in 2018 still saw like 130% jump. So much bigger than the increases associated with elections.  

And some of this difference comes down to the fact that those other events obviously are unexpected, unlike elections, since elections they’re expected, even if the outcomes are ultimately uncertain. 

Jeff Praissman: 

Got it. It makes perfect sense. I’d like to maybe take a step back and give our listeners the whole, you Overview of the market during this electoral season. Could you take them through historically how the market reacts during, let’s just go with the close election scenario, maybe starting with primary season, and then once the candidates are narrowed to two, and then, throughout the debates. Since we’re in a close election season, let’s just maybe focus on that and not the blowout seasons that we talked about earlier. 

Michael Normyle 

Yeah. I think one caveat to make upfront is looking at this. I’m going to talk about kind of average returns for these close elections. So the results during individual elections can ultimately differ. But during primary season, the market, on average, tends to sell off about 3% from the start of the year mid-March, and this is going back to 1960. 

And so that’s a period of heightened uncertainty where there are multiple candidates jockeying for the nomination for each party, but then once the field is narrowed down to the final two candidates, the election can move to the back burner a little bit. You don’t have to vote for six months or something like that. 

So we tend to see the market rise about seven percentage points from mid-March to the end of August. And then when we get into debate season, this year was a bit atypical because we had one debate in June, but typically debates occur in September and October. So that’s what I’m referring to as debate season. 

That’s another period of heightened uncertainty where the frontrunner can change from day to day, and we tend to see another sell off. This time, it’s even bigger, about six percentage points. So basically double what we saw during primary season.  

But then again, once the results are decided, the market tends to rally through year end regardless of who wins, ending the year up about 3% on average in those close election years. 

Jeff Praissman 

And, how, if at all, has this election season been different than it has been historically? 

Michael Normyle 

Yeah, it’s definitely been different. Like I mentioned we had an unusually early debate and then of course we saw a change in candidates from President Biden to Vice President Harris. But the other difference is the strength of the returns. So the S&P 500, it’s up over 20% this year. And no other close election year, going back to 1960, has seen returns that high. 

A good difference there. 

Jeff Praissman 

And I feel like the news cycle and other areas are so hyper focused on the election, right? Everything is revolving around the election in November, but really during these election years, like we don’t live in a bubble, we don’t live in a vacuum. There’s got to be other factors that are as important or possibly even more important in the election or which party wins. 

Could you talk to which factors may affect the market even more than the election itself, or at least contribute to it as well? Since we’re not just in one area of just the election matters and nothing else in this world does. 

Michael Normyle 

Yeah, and I think it changes from year to year, right? So this year, for example and even last year, a lot of the gain in the market was attributable to optimism about AI and that boosted the share prices of a lot of the Mega Cap Mag 7-type stocks. And then even more recently, we’ve seen some broadening of gains attributable to earnings broadening out and the fed pivoting to rate cuts expected to boost the economy. 

But if you take an even bigger picture look here, it’s really about the economy that matters the most. And not just to election years. So we did some research where we looked at total returns for the S&P 500 from election day to the next presidential election four years later, going back to the 1960s. 

And what there’s no clear pattern based on party or whether we had an incumbent or first term president. What really matters is whether a term overlapped with recession. And so for terms that saw a recession, the average four-year total return was about 30%. For terms without a recession, the average return was 62%. So more than double the recessionary terms. So what we should really be hoping for in the next four years if we want the best returns is no recession.  

Jeff Praissman 

Michael, this has been great. As always it’s always a pleasure to have you in for our monthly podcast. We appreciate you and NASDAQ collaborating with us. 

To our listeners for more great podcasts from Michael and all our contributors, just go on our website. You can go under Education, look for Podcasts. We’re available on, all the usual suspects. Apple Music, Spotify, Amazon Music, YouTube and so forth. And until next time, Michael, thanks again for swing by the IBKR Studio. 

Michael Normyle 

Yeah. Thanks for having me. 

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