Election Year Makes This Summer Different: More Volatility?

Hi Tigers,

The U.S. stock market closed out a bumpy July marked by election turmoil, interest-rate uncertainty and disappointing earnings that took megacap technology names on a roller-coaster ride.

How was your trading performances?

History suggests August has emerged as one of the best months of a presidential election year, on average.

However, the average spike in Wall Street’s ‘fear gauge’ has been higher in the third quarter than any other quarter.

PHOTO: GETTY IMAGES/ISTOCK

1. Summer is the strongest period for the U.S. stock market in a presidential election year.

If history is any guide, the so-called Magnificent Seven could stage a comeback as the calendar turns to August — but beware that the market is in the midst of an exceptional rotation, so relying on seasonality alone as a timing tool could easily lead one astray, market strategists say.

History suggests August has emerged as one of the best months of a presidential election year, on average, in terms of stock-market performance. It has delivered an average 3.2% monthly return for the tech-heavy $NASDAQ(.IXIC)$ Composite, the best month of election years dating back to 1971.

Meanwhile, the $S&P 500(.SPX)$ has recorded an average monthly gain of 1.3% in August, making it the fifth-best month of election years for the large-cap benchmark index, dating back to 1950. 

The $iShares Russell 2000 ETF(IWM)$ index has seen an average 3.5% monthly return in August, its second-best month of election years since 1979, said Jeffrey Hirsch, editor of the Stock Trader’s Almanac and Almanac Investor Newsletter.

SOURCE: STOCKTRADERSALMANAC.COM

“Election years have historically been bullish, with above-average performance in June, July and August, but 2024 appears to have gotten well ahead of average historical performance and is likely due for some mean reversion,” Hirsch said in a note dated July 17. “Some of these historical August gains may have been pulled forward already this year.”

U.S. stocks have posted an impressive election-year rally so far in 2024, with the $S&P 500(.SPX)$ and the $NASDAQ(.IXIC)$ up 16% and 17% year to date, respectively.

But the rally took a breather in July after Wall Street’s “Great Rotation” into long-suffering corners of the market picked up steam. Disappointing quarterly earnings from $Tesla Motors(TSLA)$ and $Alphabet(GOOG)$ $Alphabet(GOOGL)$ also prompted a brutal sell-off in tech names that previously propelled broader markets to record highs. 

2. Election year makes this summer different

To be sure, what makes this summer unique is that it’s an election year. In the past 36 years, August has actually been the worst month for $DJIA(.DJI)$ and the second-worst month for the $S&P 500(.SPX)$ , the $NASDAQ(.IXIC)$ and the $iShares Russell 2000 ETF(IWM)$ , Hirsch said.

“One likely reason for such a strong shift in August performance in election years is the fact that the top candidates are known and confirmed [by August],” he added.

3. Stocks face more volatility in August

However, the third quarter, from July through September, is often a difficult time for the stock market, said Henry Allen, macro strategist at Deutsche Bank Research. “In fact, the average spike in the $Cboe Volatility Index(VIX)$ has been higher in the third quarter than any other quarter,” he said in a Tuesday note. 

$Cboe Volatility Index(VIX)$ better known as the Vix or Wall Street’s “fear gauge,” jumped over 30% in July, to settle at 16.44 on Wednesday. That was the biggest monthly jump for the index in over two years, according to FactSet data.

Colin Graham, head of multi-asset strategies and co-head of sustainable multi-asset solutions at Robeco, said the stock-market volatility in July was simply some “noise,” as the Vix index trading between 18 and 20 is “a more normal level” compared with 12 in early July. 

“It just feels like this elastic band has got too stretched in terms of positioning, in terms of volatility, and it’s just snapped back a bit in July,” Graham told MarketWatch via phone on Tuesday.