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As the election season kicks into high gear, markets should brace for the potential of higher-than-average levels of volatility. Since 1992, the CBOE Global Market’s Volatility Index (VIX) has tended to spike in the months leading up to US presidential elections.
On average, during calendar years when there is a presidential contest, VIX scores have tended to decline over the first seven months, reaching a nadir of 18.2 in the summer heat of July. However, as markets shift their attention to the campaign trail and their competing (and often bombastic) policy visions, there is a marked uptick in financial sector volatility. In September and October of election years, the VIX has had an average value of 19.2.
Looking at these data another way, we see nearly identical results when considering what percent of days in election year months have been categorized as volatile. An index value of 20 is the rule-of-thumb threshold for describing a trading environment as above normal levels of volatility. Over the first seven months in election years, the probability that the VIX would rise above 20 for any given day has ranged from 32.4% to 34.2%. Fast-forward to October, and this probability is all the way up at 38.3%.
While these data do not pre-destine how markets will react over the next two months in the lead-up to November 5th, they offer a warning that jitters may be in high supply.
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