US elections and volatility

October traditionally sees a rise in stock market volatility, so investors should prepare themselves accordingly.

As October gets underway in earnest, strategists are lining up to suggest that more volatility is on its way. To be fair, they do appear to have history on their side. Years containing presidential elections in the US do appear to see more volatility, with much of this concentrated in the month immediately preceding the event itself.

Volatility has risen consistently in the past six presidential elections, as measured by the VIX index, although the figure is slightly skewed by the 2008 figure, when the index rose 52%, due in no small part to the ongoing financial crisis:

Date Change in VIX
31 October 1992 13%
31 October 1996 7%
31 October 2000 15%
29 October 2004 22%
31 October 2008 52%
31 October 2012 18%


With the polls still very close between the two presidential candidates, and Donald Trump still in the lead in some when third party contenders are taken into account, it is clear that the more volatile period that has dominated since the beginning of September is here to stay. As a result, investors need to be prepared for wider swings, with the actual VIX index or its ETP trackers a way of taking advantage of this increased volatility.

It is hard to tell whether the volatility will persist beyond the election. Despite their outward differences, both candidates are advocating policies based on greater infrastructure spending, so we could see a re-run of the Brexit vote, when expectations of a broad-based sell-off were confounded and the market rose steadily. A split outcome in the US, whereby a different party controls the executive and legislative branches, could see policymaking come to a halt, or at least become more consensual.

October is likely to see a return to volatility, but overall seasonality effects mean that the market can still survive this and push higher. It may just be a bumpier ride along the way. 

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