Do not wait for the US election outcome

The US presidential election is a highly publicised event, taking place every four years at the beginning of November. The Election Day is fixed as the Tuesday after the first Monday of November in years that are divisible by four. This year, it falls on Tuesday, 5 November.

While the election process for the US presidency is well known, the processes for the two chambers of the US Congress are less familiar. The 435 members of the House of Representatives (proportionally representing the US population) serve two-year terms, while the 100 Senate members (two for each state), serve six-year terms. Every November in even-numbered years, the entire House of Representatives is elected, together with roughly one-third of the Senate. So, on 5 November, Americans will not only elect their president but—just like every two years—also all the members of the House of Representatives and one-third of the Senate.

While presidential elections often grab the spotlight, the elections for the House of Representatives and the Senate are equally crucial, as they determine the balance of power in Congress, influencing legislation, policy direction, and the ability to check or support the president's agenda.

With much at stake, we test the hypothesis that risk declines after elections have taken place, providing a boost to risk assets. To test this, we look at the evolution of the VIX index, a forward-looking risk metric for US stocks that continuously prices expected market volatility. This metric has existed since the start of 1990, and since elections occur every two years, this gives us 17 elections in our sample.

As illustrated by the graph below, we find a statistically meaningful decline in the VIX in the three days after US elections. The year 2008 deserves special note, when the elections were held near the height of the Great Financial Crisis, and the VIX largely ranged between 50 and 80 around Election Day. Excluding this very turbulent period from the sample makes the average post-election VIX decline smoother, and its statistical significance increases (from a p-value of 6% to 0.6%).

VIX evolution around US elections

Source: DPAM Quantitative Equity Strategy, Bloomberg

So, could equity investors profit from this risk reduction? To answer this question, we investigate the average return of the S&P 500 around US Election Day, starting in 1928, giving us 48 elections in our sample. The chart below shows US equity investors anticipated the risk reduction brought by US elections. On average, the S&P 500 increased by 2.2% in the six days from a week before Election Day until Election Day (inclusive). Put another way, this is a 156.4% annualised return, which is obviously not only economically meaningful but also statistically significant. The odds were also in your favor, as the market increased 83.3% of the time in this period. Focusing only on years with Presidential Elections, increases the return to 2.5%, corresponding to a 190% annualized return!

Average return S&P 500 around US elections

Source: DPAM Quantitative Equity Strategy, Bloomberg

In contrast to the pre-election period, there has historically been no significant return in the days after the election. So don’t be late. Do not wait for US elections to bring more clarity!