The stock market is entering the most volatile period of the 2024 presidential election year

By Isabel Wang

Investors should expect election-related volatility in the stock market between now and Nov. 5, analysts say

U.S. financial markets seem to be signaling an all-clear following the recession scare earlier this month, as economic data appears to pave the way for the start of interest-rate cuts by the Federal Reserve.

But market analysts warn there is still no green light for the stock market as the 2024 presidential-election season gets into full swing. The S&P 500's SPX historical performance during election years suggests stocks could experience a lackluster and volatile period between now and Nov. 5.

History suggests September is the worst month in presidential-election years in terms of stock-market performance. The S&P 500 has delivered an average 0.8% monthly decline in that month, making September the weakest month during election years dating back to 1944, according to CFRA Research.

"August and September historically are two of the three worst months of an election year in terms of price return," said Sam Stovall, chief investment strategist at CFRA Research. "February, August and September have posted average declines [in election years] since World War II, with September being by far the worst - not only in its average decline, but also it has fallen more frequently than it has risen."

October, despite averaging a monthly gain of over 1% in election years, has been the most volatile month with the highest standard deviation of its monthly returns since 1944 (see table below). Standard deviation measures how widely stock prices are dispersed from the average. When stock prices go up and down frequently, standard deviation is high and thus points to a higher level of market volatility.

"October has been about 35% more volatile than the average of the other 11 months of the year," Stovall told MarketWatch on Friday. "And the reason that July and August tend to be OK months during election years is because of the promises candidates made during the campaign, and that's also when both parties have national conventions."

Moreover, history shows that whether the incumbent party ultimately retains the presidency also appears to influence market volatility and stock returns.

Since 1927, the S&P 500 has experienced more volatility before the election and in subsequent months during the years when the incumbent party failed to hold on to the White House, perhaps reflecting the uncertainty created by likely policy changes, said Thomas Poullaouec, the head of multi-asset solutions, Asia Pacific, at T. Rowe Price, and Nathan Wang, a solutions analyst at the investment-management firm.

However, when the incumbent party retained the presidency, stock-market volatility has on average declined before the election and ticked up modestly afterward, Poullaouec and Wang said in an August note.

"But this year is different ... and I'm not sure the old patterns will be able to assist what the market is potentially projecting," Stovall said. "With Harris supposedly leading in the polls, now the question is why is the market going up?"

"The pace of the turnaround" in the presidential-election polls after the change in the Democratic Party nominee from President Joe Biden to Vice President Kamala Harris has added an extra layer of volatility to markets, said Arnim Holzer, global macroeconomic strategist at Easterly EAB Risk Solutions.

See: Betting markets now see Kamala Harris beating Donald Trump in November

At this point, Harris is leading Republican nominee Donald Trump in most national polls and in betting markets. The former president currently has a 46.4% chance of prevailing in November's presidential election, after peaking at 66% on July 15, the day the GOP convention kicked off in Milwaukee. Harris is now at 52% following the start of the Democratic convention in Chicago on Monday, according to a RealClearPolitics average of six betting markets.

"While customarily the market discounts election implications, the pace of the turnaround in the presidential-election polls necessitated investor action after the earlier strong Trump polling," Holzer said, adding that the sector rotation in the stock market associated with a potential Trump victory could be a source of volatility between now and Election Day.

For example, investors in the healthcare industry have a clear favorite when it comes to the presidential race - Trump. Some hope that the former president will make changes in laws and regulations that could have a huge impact on sales and profits for health insurers, hospitals and drug and medical-device companies.

The S&P 500's healthcare sector XX:SP500.35 has advanced 4.3% over the past month, outperforming the S&P 500's 1.7% rise in the same period, according to FactSet data.

Stocks in the healthcare sector have seen a strong earnings growth this year, with weight-loss drugs like Ozempic and Zepbound taking the pharmaceutical industry by storm, but some of that bump needs to be taken with a grain of salt, particularly in an election year, Holzer told MarketWatch in a phone interview on Friday.

"Despite Harris gaining some momentum in polls as of late, the healthcare stocks have not shown any concern for the potential policy curtailing drug prices from a Harris administration," Holzer said. "Unexpectedly, healthcare also outperformed the S&P 500, but if current polling trends continue, we anticipate that Democratic policies on drug pricing may start to weigh on managed care and pharmaceutical returns as the election progresses."

See: Medicare's negotiated drug prices will save taxpayers $6 billion in first year, White House says

The "neck-and-neck" presidential race between Trump and Harris suggests "investors have to take into account that some of the optimism around the healthcare sector will be tempered [if Harris takes office], or at least investors should recognize there is a potential that companies are not going to face a fully open market," Holzer said.

Holzer said this type of election-related market rotation will likely propel the Cboe Volatility Index, or VIX, higher in the next two months. Wall Street's so-called fear gauge VIX was up 8.4% to trade at 15.88 on Tuesday, according to FactSet data.

See: Stock market's 'fragile' bounce at stake as Powell prepares Jackson Hole speech

U.S. stocks finished lower on Tuesday as investors waited for Federal Reserve Chair Jerome Powell to set the tone for the scope of potential interest-rate cuts in his speech at the Kansas City Fed's annual symposium in Jackson Hole, Wyo., on Friday. The S&P 500 was off 0.2%, while the Nasdaq Composite COMP lost 0.3% and the Dow Jones Industrial Average DJIA edged down less than 0.2%, according to FactSet data.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-20-24 1643ET

Copyright (c) 2024 Dow Jones & Company, Inc.