15 AUGUST 2024
It is not only stock markets that shrug off elections over the longer term. As shown by the chart below, which covers periods all the way back to 1860, there is no statistical relationship between the performance of a 60/40 equity/bond portfolio in presidential elections years and those in non-election years.
Whilst the market may not be perfectly efficient, sources of inefficiency are rare, usually under the radar and eventually arbitraged away. A well-known, headline dominating event such as the US election process clearly falls outside that definition, meaning markets “price it in”.
Commentators may well attribute volatility to changes in the direction of policy but of course, they do so only with the benefit of hindsight. Market volatility is really caused by dozens, if not hundreds of factors. In fact, volatility leading up to and just after the election tends to be slightly lower than during other periods, perhaps because the market is getting closer to the result and the certainty it usually craves, whatever the outcome.
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