Investors get emotional as Election Day nears
November 04, 2020
Stock market volatility remained elevated last week as investors wrestled with heightened uncertainty and emotion. Strong earnings and record-setting GDP growth in Q3 has done little to relieve the anxiety investors feel around rising coronavirus cases and political uncertainty. Weakness over the last two months has lowered the price-to-earnings ratio for the S&P 500® Index from 23-times earnings to 20-times earnings, although the current P/E remains elevated compared with the long-term average and provides little cushion against declining stock prices.
Historically, markets are calm in the months preceding presidential elections as investors adopt a wait-and-see posture. In the past four presidential election cycles, the two months leading up to the election were much less volatile than average. The one exception was 2008, when volatility was driven more by macro-economic factors (e.g., the global financial crisis) than political.
This year’s election, held in the midst of a global pandemic, is another notable outlier. The S&P 500 has seen a directional move of greater than 1% on 21 trading days over the past two months. That’s about half of the total trading days and nearly three times the number in the two months leading up to the 2016 election. Similarly, the S&P 500 has moved at least 1% up or down in 47% of the last 30 trading days. While 90% of the trading days in April saw a plus/minus 1-percent move, last month’s number is well above the long-term average of 26%. In periods of anxiety and uncertainty, investors’ tendency to “do something” often leads to elevated volatility. That tendency is usually misplaced and leads to market whipsaws and poor investment performance.
Review relevant client material from Nationwide