With the Federal Reserve policy meeting now out of the way, investors can turn their full attention to the next potentially market-moving event: The November election, just over one month away.
This one is particularly interesting since the two presidential candidates are polar opposites. It’s the career political insider with the baggage that comes from decades in D.C., vs the controversial career businessman who’s a political unknown.
Financial markets are politically agnostic for the most part, but what markets hate most of all is uncertainty … which is what we have in spades this election year.
In one corner is Hillary Clinton, the consummate Washington insider. For some voters, she’s seen as the more capable candidate. After all she had eight years of on-the-job training when her husband occupied the White House … talk about baggage! But for others, she’s seen as a symbol of all that’s wrong with D.C. political dysfunction.
Donald Trump by contrast is the brash outsider who some voters believe can shake up Washington politics and get things done. But for others, he’s a dangerous political unknown who could bring about the end of western civilization as we know it.
Clinton was judged to have won the first debate on Monday, and she got a small bump in the polls. But the race is still too-close-to-call with two more debates and just five weeks of campaigning remaining.
According to the 2016 Election Forecast by FiveThirtyEight (see the chart above), Clinton is in the lead, but by a slim margin. The chart is updated daily. As of this morning, she is projected to win 46.8% of the popular vote vs. Trump’s 43.8% (with about 8% going to the Libertarian Party’s Gary Johnson).
That means the election could literally come down to the wire, which also means plenty of uncertainty – and market volatility – between now and then.
And we’ve already seen volatility pick up. After Monday’s debate, Dow futures jumped nearly 200 points overnight, only to give it all back by the time markets opened Tuesday. Expect more to come.
Volatility is highly correlated with political uncertainty, which we certainly have this year, and the market’s favorite fear-gauge, the CBOE Volatility Index (VIX) typically rises by 40% on average in the two months leading up to Election Day.
What’s more, when elections are a close call (think Bush v Gore in 2000) and uncertainty is high, stocks have sold off about 5-to-6% on average between September and November.
Bottom line: Keep a watchful eye on shifting election odds, and buckle your seatbelt for more volatility ahead.